Atwater Corporation manufactures winter sports equipment. The company has decided to introduce a new line of snowmobiles, the XLR8, for next winter. These snowmobiles will be sold to retailers for $4,200 per vehicle. Because Atwater has some idle capacity, only $500,000 for additional fixed costs will be incurred annually. Atwater expects to manufacture and sell 10,000 XLR8 snowmobiles during the first year. Other estimated manufacturing costs per snowmobile are as follows:

Direct Materials $1,500

Direct Labor $1,750

Variable Overhead $250

The above costs include the costs of manufacturing the high performance engine for the XLR8.

Atwater is also considering buying these engines from Premier Motors for $600 per engine. If Atwater buys the engines from Premier, Atwater would reduce its direct labor cost by 10%, its direct materials cost by 25%, its variable overhead cost by 10%, and the $500,000 of fixed costs by 70%.

(A) Should Atwater make or buy the engines? Show calculations supporting your answer.

(B) What would be the maximum outside purchase price acceptable to Atwater for each engine assuming that 10,000 XLR8 snowmobiles are manufactured during the first year? Show calculations to support your answer.

(C) Revised estimates show a first year sales volume of 20,000 XLR8 snowmobiles. At this new volume, additional equipment, at an annual rental cost of $200,000 must be acquired to manufacture enough high performance engines. This additional equipment gives Atwater the capacity to produce up to 35,000 engines each year. [Note: This equipment is used exclusively to manufacture the engines and no other component of the snowmobile.] Atwater expects sales on the XLR8 to level off at 30,000 snowmobiles during the second year. Under the revised circumstances, should Atwater make or buy the engines? Show calculations supporting your answer.

(D) What qualitative factors (list at least three) should Atwater consider in deciding whether to make or buy the high performance engines?