For many years Futura Company has purchased the starters that it installs in its
ID: 2500321 • Letter: F
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 $15.35 per unit purchase price:
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 new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $87,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.)
Relevant Cost Per Unit ______
Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.)
Relevant Cost Per unit _________
What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
Profit would _____ by _______ per period
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 $15.35 per unit purchase price:
Explanation / Answer
Futura Company Details Depreciation cost is not relevant as no new machiner required for starters and it is a sunk cost Rent also not relevant as no additional rent is required and existing machine space will be used for starters Relevant cost of producing Starters Details Amt$ per units Total Units Produced annually 55,000 Direct Materials 5.00 275,000 Direct Labor 2.80 154,000 Supervision 1.40 77,000 Variable Mfg OH 0.40 22,000 Total Relevant Cost $ 9.60 $ 528,000 1. Relevant cost of produning per unit = $ 9.60 2 Relevant cost of purchase per unit from outside supplier , = $ 15.35 3 Total cost of manufacture per year 528,000 Total cost of outside purchase per year= 844,250 Decrease in Profit due to purchase from outside suppliers rather than manufacturing = $ 316,250 Profit would reduce by $316,250 per period
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