The Engine Guys produces specialized engines for “snow climber” buses. The company’s normal monthly production volume is 1,000 engines, whereas its monthly production capacity is 2,000 engines. The current selling price per engine is $1,260. The cost per unit of manufacturing and marketing the engines at the normal volume is as follows:

                                                     Costs per Unit for Engines
Manufacturing costs:
Direct materials ......................................................... $160
Direct labour ................................................................ 200
Variable overhead ......................................................... 40
Fixed overhead ............................................................ 200
Subtotal ..................................................................... $600
Marketing costs:
Variable ...................................................................... $ 60
Fixed ............................................................................ 140
Subtotal ...................................................................... 200
Total unit cost .......................................................... $800

Required:

Answer the following independent questions.

1. The Provincial Bus Company wishes to purchase 300 engines in October. The bus company is willing to pay a fixed fee of $480,000 and reimburse The Engine Guys for all manufacturing costs incurred to manufacture 300 motors. October is a busy month for The Engine Guys, and there are sufficient orders to operate at 100% capacity utilization. There will be no variable marketing costs on this government contract. Indicate whether the Provincial Bus Company’s contract should be accepted. Provide all supporting calculations.

2. An outside contractor is willing to supply 500 engines at a price of $600 per unit. If the offer is accepted, the company will make 500 engines in-house and buy 500 engines from the contractor. The company’s fixed manufacturing costs will decline by 20% and the variable marketing costs per unit on the 500 engines purchased will decline by 40%. Determine whether the contractor’s offer should be accepted. Provide all supporting calculations.