Futura Company purchases the 69,000 starters that it installs in its standard li
ID: 2560761 • Letter: F
Question
Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.50 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 $11.40 as shown below: Direct materials Supervision Variable manufacturing overhead Total product cost $ 5.00 labor 3.00 1.50 $103,500 1.20 82,800 0.50 0.40 27,600 $11.40 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $103,500) 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 $87000 per period. Depreciation is due to obsolescence rather than wear and tear. Required What is the financial advantage (disadvantage) of making the 82800 starters instead of buying them from an outside supplier?Explanation / Answer
Cost of Production
Direct Material
$5.00
Direct Labor
$3.00
Variable Manufacturing overhead
$0.50
Total cost of production
$8.50
Cost of Buying
$11.50
Less: cost of production
$8.50
Savings per unit
$3.00
Number of units
69,000
Savings per unit
$3.00
Total savings
$2,07,000
Less: Salary of Supervisor
$1,03,500
Net Advantage - by making
$1,03,500
Since Depreciation and Rent expense are not relevant, these expenses are not considered.
Cost of Production
Direct Material
$5.00
Direct Labor
$3.00
Variable Manufacturing overhead
$0.50
Total cost of production
$8.50
Cost of Buying
$11.50
Less: cost of production
$8.50
Savings per unit
$3.00
Number of units
69,000
Savings per unit
$3.00
Total savings
$2,07,000
Less: Salary of Supervisor
$1,03,500
Net Advantage - by making
$1,03,500
Since Depreciation and Rent expense are not relevant, these expenses are not considered.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.