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problem: Relevant costs, special sales order-idle versus full capacity Hull Motors, Inc. [HMI], create small gasoline-powered motors for use in lawn mowers. The firm has been growing steadily over the past five (5) years and is operating at full capacity. Hull Motors has recently completed the addition of new plant & machine at a cost of $ 7,800.000. There by raising its manufacturing capacity to 100,000 motors yearly. The addition [0 plant and machine will be depreciated on a straight-line basis over 10 years.]

Sales of motors were 60,000 units prior to completion of the additional capacity. Cost records indicated that manufacturing costs had totaled dollar 60 per motor, of which $48 per motor was considered to be variable manufacturing costs. Hull Motors has used the volume of activity at full capacity as the basis for applying manufacturing overhead. The normal selling price is $80 per motor, & Hull Motors pays a 5 percent commission on the sale of its motors.

LawnPro has offered to buy 35,000 motors at a value of $60 per unit to test the viability of distributing lawn mower replacement motors through its site. Hull Motors would be expected to produce motors, store them in its ware home & ship individual motors to LawnPro consumers. As orders are placed directly through the LawnPro site, they would be forwarded instantly to Hull Motors. There will be no commissions paid on this sales order, & freight charges will be paid by the consumer purchasing a motor.

Required:

Suppose that sales of motors in Hull Motors regular market are expected to increase by 33% in the next 12 months. Should the offer from lawnPro be accepted? describe your reasoning?

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M923003

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