Petro Motors Inc. (PMI) produces small gasoline-powered motors for use in lawn mowers. The company has been growing steadily over the past five years and is operating at full capacity. PMI recently completed the addition of new plant and equipment at a cost of $7,800,000, thereby increasing its manufacturing capacity to 100,000 motors annually. The addition to plant and equipment will be depreciated on a straight-line basis over 10 years. Sales of motors were 60,000 units prior to the completion of the additional capacity. Cost records indicated that manufacturing costs had totaled $60 per motor, of which $48 per motor was considered to be variable manufacturing costs. PMI has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The normal selling price is $80 per motor, and PMI pays a 5% commission on the sale of its motors. LawnPro.com offered to purchase 35,000 motors at a price of $60 per unit to test the viability of distributing lawn mower replacement motors through its website. PMI would be expected to produce the motors, store them in its warehouse, and ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com website, they would be forwarded instantly to PMI. No commissions will be paid on this special sales order, and freight charges will be paid by the customer purchasing a motor. b. Identify all the relevant costs that PMI should consider in evaluating the special sales order from LawnPro.com. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double clic the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) 2 Variable manufacturing costs per motor. 7 Cost associated with storing the motors in the PMI Warehouse to await shipment. ? Fixed costs. ? Commissions and freight.
Petro Motors Inc. (PMI) produces small gasoline-powered motors for use in lawn mowers. The company has been growing steadily over the past five years and is operating at full capacity. PMI recently completed the addition of new plant and equipment at a cost of $7,800,000, thereby increasing its manufacturing capacity to 100,000 motors annually. The addition to plant and equipment will be depreciated on a straight-line basis over 10 years. Sales of motors were 60,000 units prior to the completion of the additional capacity. Cost records indicated that manufacturing costs had totaled $60 per motor, of which $48 per motor was considered to be variable manufacturing costs. PMI has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The normal selling price is $80 per motor, and PMI pays a 5% commission on the sale of its motors. LawnPro.com offered to purchase 35,000 motors at a price of $60 per unit to test the viability of distributing lawn mower replacement motors through its website. PMI would be expected to produce the motors, store them in its warehouse, and ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com website, they would be forwarded instantly to PMI. No commissions will be paid on this special sales order, and freight charges will be paid by the customer purchasing a motor. b. Identify all the relevant costs that PMI should consider in evaluating the special sales order from LawnPro.com. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double clic the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) 2 Variable manufacturing costs per motor. 7 Cost associated with storing the motors in the PMI Warehouse to await shipment. ? Fixed costs. ? Commissions and freight.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 18P
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![Required information
[The following information applies to the questions displayed below.]
Petro Motors Inc. (PMI) produces small gasoline-powered motors for use in lawn mowers. The company has been growing
steadily over the past five years and is operating at full capacity. PMI recently completed the addition of new plant and
equipment at a cost of $7,800,000, thereby increasing its manufacturing capacity to 100,000 motors annually. The addition
to plant and equipment will be depreciated on a straight-line basis over 10 years.
Sales of motors were 60,000 units prior to the completion of the additional capacity. Cost records indicated that
manufacturing costs had totaled $60 per motor, of which $48 per motor was considered to be variable manufacturing
costs. PMI has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The
normal selling price is $80 per motor, and PMI pays a 5% commission on the sale of its motors.
LawnPro.com offered to purchase 35,000 motors at a price of $60 per unit to test the viability of distributing lawn mower
replacement motors through its website. PMI would be expected to produce the motors, store them in its warehouse, and
ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com website, they
would be forwarded instantly to PMI. No commissions will be paid on this special sales order, and freight charges will be
paid by the customer purchasing a motor.
b. Identify all the relevant costs that PMI should consider in evaluating the special sales order from LawnPro.com. (You may select
more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click
the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically
graded as incorrect.)
? Variable manufacturing costs per motor.
? Cost associated with storing the motors in the PMI Warehouse to await shipment.
? Fixed costs.
? Commissions and freight.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F432d0e5b-976a-477c-8f94-be3c5e253b00%2F6d15d21b-a621-4d97-a9db-9d1f3f334d93%2Fl65qh1_processed.png&w=3840&q=75)
Transcribed Image Text:Required information
[The following information applies to the questions displayed below.]
Petro Motors Inc. (PMI) produces small gasoline-powered motors for use in lawn mowers. The company has been growing
steadily over the past five years and is operating at full capacity. PMI recently completed the addition of new plant and
equipment at a cost of $7,800,000, thereby increasing its manufacturing capacity to 100,000 motors annually. The addition
to plant and equipment will be depreciated on a straight-line basis over 10 years.
Sales of motors were 60,000 units prior to the completion of the additional capacity. Cost records indicated that
manufacturing costs had totaled $60 per motor, of which $48 per motor was considered to be variable manufacturing
costs. PMI has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The
normal selling price is $80 per motor, and PMI pays a 5% commission on the sale of its motors.
LawnPro.com offered to purchase 35,000 motors at a price of $60 per unit to test the viability of distributing lawn mower
replacement motors through its website. PMI would be expected to produce the motors, store them in its warehouse, and
ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com website, they
would be forwarded instantly to PMI. No commissions will be paid on this special sales order, and freight charges will be
paid by the customer purchasing a motor.
b. Identify all the relevant costs that PMI should consider in evaluating the special sales order from LawnPro.com. (You may select
more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click
the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically
graded as incorrect.)
? Variable manufacturing costs per motor.
? Cost associated with storing the motors in the PMI Warehouse to await shipment.
? Fixed costs.
? Commissions and freight.
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