1.

Hector, Inc. currently makes and sells approximately 5,000 shovels per year. Hector has an offer to buy the shovels it currently makes at a price that is below its cost of making them. Based on this information Hector is faced with a(n)

special order decision.

asset replacement decision.

outsourcing decision.

segment elimination decision.

2.

U-RIDE, Inc. currently produces the electric engines that are used in golf carts made and sold by the Company. Electco has offered to sell the electric engines to U-RIDE at a price of $200 each.

Current production information follows:

Unit-level material and labor	$ 175
Facility-level depreciation of manufacturing equip.	$ 5,000/month
Product-level engine production supervisor's salary	$ 2,000/month
Annual facility-level utilities	$ 15,000

U-RIDE is currently operating profitably producing and selling 2,000 engines a year using 90% of its manufacturing capacity. Which of the following is true?

U-RIDE should make the engines for cost savings of $25 per unit.

Buying the units would increase U-RIDE's cost by $13 per unit.

U-RIDE has avoidable costs of greater than $200 per unit and should therefore buy the engines.

Buying the units would increase profitability by $38 per unit.

2b.

Buying the engines will free up manufacturing capacity that could be used to make a new economy line golf cart that would produce an additional $36,000 profit per year. U-RIDE is currently operating profitably producing and selling 2,000 engines annually. Based on this information, which of the following is true?

The $36,000 is not relevant because it is an estimate.

Buying the units would increase U-RIDE's cost by $13 per unit.

U-RIDE has avoidable costs of less than $200 per unit and should therefore buy engines.

The cost of buying the engines is $5 per unit less than the relevant cost of making the units.