tractors. Due to a reduction in output, the company has idle capacity that could

ID: 2557566 • Letter: T

Question

tractors. Due to a reduction in output, the company has idle capacity that could be For many years Futura Company used to produce the starters. The chief engineer per unit purchase price: has purchased the starters that it installs in its standard ine of farm has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8 recommended UnitTotal S 3.10 Direct materiais Direct labor 2.70 1.50 $80,000 1.00 $40,000 0.60 Variable manfacturing overhead Rent 0.30 $12,000 S 920 Total product cost so that no new equipment would have to be would have to be hired to oversee production of the starters. However, the company has suficient ide tools and m purchased. The rent charge above is based on space utilized in the pliant. The total rent on the plant is e0,000 per period, Deprecilation is due to cosciescence Required 1 Determine the total relevant cost per unvt if starters are made inside he company (Round your answer to 2 od. Depreciation is due to cbsolescence rather than wear and tear decimal places 2. Detemmine the total relevant cost per unit if staners are purchased, (Round your answer to 2 rather than maxing tmem inside the company? (Do not round intermediate calculations) 3. What is the increase or decrease in profits as &results; of purchasing the staters

Explanation / Answer

Relevant cost for making inside

Direct material

$3.10

Direct labour

$2.70

Supervision

$1.50

Variable manufacturing overhead

$0.60

Total relevant cost

$7.90

If purchase outside relevant cost per unit

Purchase from outside

$8.40

Effect on Profit

No of units produced (60,000/1.50) units

40,000

Purchase from outside (40,000*8.40)

$336,000

Produced inside (40,000*$7.90)

($316,000)

Difference (Increase in profit)

$20,000

Ans

Profit would INCREASE by $20,000 per period