McVay Industries (MI) produces ice cream supplies including bowls, scoops and shake makers.

MI made $605,000 of pre-tax profit last year. They are looking for ways to improve profitability

and are considering outsourcing production of their shake makers. Juan Hernandez, the controller,

compiled the following information.

Bowls

Scoops

Shake

Makers

TOTAL

Units Manufactured and sold

2,000,000

500,000

100,000

DM per unit

$0.50

$1.25

$5.00

DL per unit

$0.10

$0.50

$4.00

VMOH per unit

$0.15

$0.25

$5.00

FMOH per unit (based on current

production)

$0.40

$0.50

$5.00

Total Cost per unit

$1.15

$2.50

$19.00

Selling Price

$2.00

$4.00

$25.00

Gross Profit per Unit

$0.85

$1.50

$6.00

Total Sales

$4,000,000

$2,000,00

0

$2,500,000

$8,500,000

Total COGS

$2,300,000

$1,250,00

0

$1,900,000

$5,450,000

Total Gross Profit

$1,700,000

$750,000

$600,000

$3,050,000

Total Variable (selling) costs

($300,000)

($100,000)

($125,000)

($525,000)

SG&A Fixed Costs - Direct*

($400,000)

($200,000)

($100,000)

($700,000)

SG&A Fixed Costs - Common**

($680,000)

($300,000)

($240,000)

($1,220,000)

Pre-Tax Profit

$320,000

$150,000

$135,000

$605,000

* Direct SG&A Fixed Costs can be eliminated if the specific product is outsourced.

** Common SG&A Fixed Costs can not be eliminated even if the specific product is outsourced.

If the shake maker is outsourced, fixed manufacturing overhead costs of $100,000 to lease

machinery related to shake maker production could be eliminated. Assume that direct fixed SG&A

expenses relate directly to the shake makers line and could be completely eliminated if the shake

maker product line is dropped.

Additionally, if the shake maker is outsourced, the company would have idle capacity and could

produce and sell an additional 150,000 bowls (for the same selling price of $2 per bowl).

Question: What is the maximum amount MI should pay for the shake maker from an

independent supplier (price per unit) to be no worse off financially? Show your work.