Futura Company purchases the 76,000 starters that it installs in its standard li
ID: 2513019 • Letter: F
Question
Futura Company purchases the 76,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $9.70 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company’s chief engineer is opposed to making the starters because the production cost per unit is $10.70 as shown below:
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $144,400) to oversee production. However, the company has sufficient idle tools and machinery such 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 $86,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 76,000 starters instead of buying them from an outside supplier?
Per Unit Total Direct materials $ 4.00 Direct labor 2.80 Supervision 1.90 $ 144,400 Depreciation 1.20 $ 91,200 Variable manufacturing overhead 0.40 Rent 0.60 $ 45,600 Total product cost $ 10.70Explanation / Answer
The financial advantage of making the 76000 starters instead of buying them from an outside supplier is $45600.
Note: Rent being an allocated cost is not considered since it is irrelevant and will continue to be incurred irrespective of whether the starters are produced or purchased. Depreciation is a sunk cost and also is unchanged irrespective of the decision and hence is irrelevant.
Make Buy Financial advantage (disadvantage) Purchase price (76000 x $9.70) 0 737200 737200 Direct materials (76000 x $4) 304000 0 -304000 Direct labor (76000 x $2.80) 212800 0 -212800 Variable manufacturing overhead (76000 x $0.40) 30400 0 -30400 Supervision 144400 0 -144400 Total $ 691600 737200 45600Related Questions
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