The Adrenaline company manufactures ATVs. Adrenaline manufactures two types of ATVs: Regular and Hyper. The Hyper ATV uses a special Turbo engine, which increases the acceleration and power of the engine. Adrenaline produces the engines, but outsources the turbocharger from Turbo, Inc for $500 per unit. Currently, Adrenaline produces and sells 600 units of its standard model and 400 of its Turbo model every year. The Hyper model requires a special machine for installation, which is operating at capacity. Apart from the engine, the two models are the same and are purchased from a larger ATV manufacturer for $5,000 each.

 

The data for the two engines units is given below.

 

	Regular	Hyper
Raw Materials	$400	$1,050 (including turbocharger for $500)
Labor	20 hrs @ $30	30 hrs @ $30
Variable Overhead	$40 per DLH	$30 per DLH
Fixed Overhead	$50 per DLH	$40 per DLH
Market Price	$10,000	$15,000

 

Adrenaline is considering whether to rent a plant for $20,000 per year to produce the 400 units of the turbocharger instead of purchasing them. The budgeted costs per unit for 400 units (not including rent) are as follows:

 

Thermo. System
Raw Materials	$150
Direct Labor	2 hr @ $30
Variable Overhead	$80 per DLH
Fixed Overhead	$70 per DLH
Capacity	1000 units

 

Adrenaline would have to send the part to its assembly plant at $10 per unit.

 

Required:

1. Should Adrenaline continue to buy the turbocharger from Turbo Inc.?

2. Adrenaline is considering renting an additional machine ($50,000 annual rent) that can install the turbocharged engine. The marketing department believes it can sell an additional 100 units, but the market price for the Hyper model will drop to $14,000 per unit. Should Adrenaline rent the additional machine? (Assume that all other costs per unit are the same. Also, answer this question without changing your answer to question 1).

Answer rating: 100% (QA)

1 No because the cost of inhouse production of turbochargers by incurring 20000 rent expense for pla... View the full answer