For many years Futura Company has purchased the starters that it installs in its

Question

For many years Futura Company has purchased the starters that it installs in its standard line of farm 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 $10.80 per unit purchase price Per Unit $ 5.00 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 2.20 2.00 $130,000 1.30 84,500 0.80 0.50 $ 32,500 Total product cost $11.80 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 $90,000 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

Explanation / Answer

Req 1: Cost of manufacturing 65000 starters: Direct material (@5.00 per unit) 325000 Direct labour(@2.20 per unit) 143000 Variable manufacturing overheads(@0.80 per unit) 52000 Supervisors salary 130000 Total cost of manufacturing 650,000 Starters Production 65,000 Cost of production per starter $ 10 per starter Req 2: Relevant cost of buying the Starter from outside $10.80 per starter Req 3: Total cost of manufacturing 65,000 starters @$ 10 per starter 650,000 Cost of Buying from Supplier (65000 units@10.80) 702,000 Financial advantage of manufacturing 52,000 Profit would increase by $ 52,000 per period Therefore, the company must manufacture the starters. Note: Rent and depreciation are the expense, which have to be borne by the company while buying the starters from suppliers. Hence, it is irrelevant cost.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.