Futura Company purchases the 70,000 starters that it installs in its standard li
ID: 2545139 • Letter: F
Question
Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.80 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 $11.50 as shown below:
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $133,000) 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 $81,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 70,000 starters instead of buying them from an outside supplier?
Per Unit Total Direct materials $ 5.00 Direct labor 3.00 Supervision 1.90 $ 133,000 Depreciation 1.00 $ 70,000 Variable manufacturing overhead 0.30 Rent 0.30 $ 21,000 Total product cost $ 11.50Explanation / Answer
Differential analysis :
If product make instead of buying then financial advantage of (756000-714000) = 42000
Make Buy Direct material (70000*5) 350000 Direct labour (70000*3) 210000 Supervisory's salary 133000 Variable manufacturing overhead (70000*.30) 21000 Purchase cost (70000*10.80) 756000 Total 714000 756000Related Questions
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