Falco Scooter Company, per-unit information City-100 Super-300 Selling price $660 $3,000 Direct Materials (includes engine) $420 $1,260 Machine Hours 1 4 Direct Labor 5 DLHS @ $30 per DLH 20 DLHS @ $30 per DLH Variable Overhead Allocation $6 per DLH $6 per DLH Fixed Overhead Allocation $9 per DLH $9 per DLH Scorpion Motors, per-unit information Standard Deluxe Selling price $75 $300 Direct Materials Machine Hours $15 1 $120 3 Direct Labor 1 DLH @ $30 per DLH 2 DLHS @ $30 per DLH Variable Overhead Allocation $15 Fixed Overhead Allocation per DLH $15 per DLH $3 per DLH $3 per DLH NOTE: Falco Group managers believe that variable overhead at each division is really driven by direct labor hours. Required. You are a CPA internal consultant employed by the Falco Group, helping Falco Scooters address the issues below. Ignore taxes. Keep in mind that both Falco Scooter Company and Scorpion Motors are wholly-owned subsidiaries of the Falco Group. 1. Falco Scooters expects to sell 1,000 Super-300's annually. From the point of view of the Falco Group, should the engines for Super-300's be purchased from the external supplier or made internally, by Scorpion Motors? What is the total financial impact on Falco Group if Falco Scooters switches to in-sourcing the engines? 2. Falco Scooters' marketing department estimates that if the selling price on Super-300's is lowered to $2,925 per unit, annual sales of this model will increase to 1,350 units. Should the company lower the price? How should they obtain the engine (make at Scorpion Motors or buy from outside supplier) under this alternative pricing strategy? Provide full financial analysis of the various alternatives. 3. Falco Scooters' divisional managers' bonus incentives are tied to the division's net operating income (NOI, computed using GAAP). For various reasons, the division does not appear to be on track to meet the NOI target needed to earn bonuses for divisional managers. Falco Scooters' controller notes that the unit margins on City-100's are so low that the division would increase its NOI if its stops producing and selling City-100's and instead make Super- 300's for inventory. a. While City-100's unit contribution margin is low, it is still positive. Conceptually, how can the controller's proposal - to stop producing and selling City-100's and instead make Super-300's for inventory - provide the division with a higher NOI? b. Comment on the controller's proposal. Are there any problems with this proposal? Is it a good idea from the point of view of the Falco Group's shareholders? 2