For many years Fut tractors. Due to a reduction in output, the company has idle
ID: 2524964 • Letter: F
Question
For many years Fut 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 65,000 starters needed would be greater than the current $12.90 per unit purchase pice ura Company has purchased the starters that it installs in its standard line of farm Total Per Unit S 7.00 2.50 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 1.80 $ 117,000 1.30 84,500 0.60 0.50 32,500 Total product cost $ 13.70 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 Required 1. 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 2. 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 3. 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 per periodExplanation / Answer
1. Relevant cost for production of 1 unit of starter:
Direct material
$7.0
Direct labor
2.5
Supervision
1.8
Variable manufacturing overhead
0.6
Total relevant cost
$11.9
Note:
As depreciation is due to obsolescence, and no new equipment was purchased, it was considered as not relevant. Further the rent is also considered as non relevant as space utilized was inside the plant.
2. Relevant cost per unit, if starters are purchased from an outside supplier:
Relevant cost per unit $12.90
3. Increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company = $12.90 - $11.9 = $1.0
For 65000 units = 65000 x $1.0 = $65000.
Direct material
$7.0
Direct labor
2.5
Supervision
1.8
Variable manufacturing overhead
0.6
Total relevant cost
$11.9
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