Problem $4-59($Algo$)$ Make or Buy $($LO $4-4)$

Florida Kitchens produces high$-$end cooking ranges. The costs to manufacture and market the ranges at the company$$s volume of $3,000$ units per quarter are shown in the following table:

Unit manufacturing costs

Variable costs $ $1,600$

Fixed overhead $752$

Total unit manufacturing costs $ $2,352$

Unit nonmanufacturing costs

Variable $520$

Fixed $872$

Total unit nonmanufacturing costs $1,392$

Total unit costs $ $3,744$

The company has the capacity to produce $3,000$ units per quarter and always operates at full capacity. The ranges sell for $$4,400$ per unit.

Required:

a$.$ Florida Kitchens receives a proposal from an outside contractor, Burns Electric, who will manufacture $1,200$ of the $3,000$ ranges per quarter and ship them directly to Florida$$s customers as orders are received from the sales office at Florida. Florida would provide the materials for the ranges, but Burns would assemble, box, and ship the ranges. The variable manufacturing costs would be reduced by $40$ percent for the $1,200$ ranges assembled by Burns. Florida$$s fixed nonmanufacturing costs would be unaffected, but its variable nonmanufacturing costs would be cut by $60$ percent for these $1,200$ units produced by Burns. The Florida plant would operate at $60$ percent of its normal level, and total fixed manufacturing costs would be cut by $20$ percent.

a$-1.$ What in$-$house unit cost should be compared with the quotation received from Burns Electric? Assume the payment to the outside contractor is $$872.$

a$-2.$ Should the proposal be accepted for a price $($that is$,$ payment to the contractor$)$ of $$872$ per unit?

b$.$ Assume the same facts as in requirement $($a$)$ but assume that the idle facilities would be used to produce $320$ specialty ranges per quarter. These ranges could be sold for $$19,600$ each, while the costs of production would be $$13,450$ per unit variable manufacturing cost. Variable marketing costs would be $$480$ per unit. Fixed nonmanufacturing and manufacturing costs would be unchanged whether the original $3,000$ regular ranges were manufactured or the mix of $1,800$ regular ranges plus $320$ specialty ranges was produced.

b$-1.$ Considering this opportunity to use the freed$-$up space, what is the maximum purchase price per unit that Florida Kitchens should be willing to pay the Burns Electric to assemble regular ranges?

b$-2.$ Should the Burns' proposal of $$872$ per unit be accepted?