Question
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 55,000 starters needed would be greater than the current $15.90 per unit purchase price Per UnitTotal $ 6.00 Direct materials Direct labor Supervisiorn Depreciation Variable manufacturing overhead Rent 2.50 1.50 82.500 1.50 82,500 0.50 0.50 27,500 ent $ 12.50 Total product cost A supervisor would have to be hired to oversee production of the starters However, the company has sufficient idle tools and machinery so that no ne above is based on space utilized in the plant. The total rent on the plant is $81,000 per period. Depreciation w equipment would have to be purchased. The rent charge is due to obsolescence rather than wear and tear
Explanation / Answer
2. Relevant cost per unit = $ 15.90 per unit.
3. Profit would decrease by $ 297,000 per period.
Make Buy $ $ Purchase cost ( $ 15.90 x 55,000) 874,500 Relevant costs of making: Total variable cost ( Direct materials + Direct labor + Variable manufacturing overhead) ( $ 9 x 55,000) 495,000 Supervision 82,500 Total cost 577,500 874,500
