For many years Futura Company has purchased the starters that it installs in its
ID: 2575837 • Letter: F
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 cost to produce the starters would be greater than the current $12.40 per unit purchase price: Per Unit Tot S 7.00 Direct materials Direct labor Depreciation Variable manufacturing overhead Rent Total product cost 2.50 1.60 $80,000 1.10 $55,000 0.60 0.30 $15,000 S 13.10 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 $83,000 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.) elevant 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.) t wouldExplanation / Answer
Answer 1)
Note : In relevant costing only those cost are to be considerd which is important for decision makng .Only those cost which are exclusively incurre for producing the staters are revelant costs. Thus depreciation & rent are irrelevant cost & are not to be considered as those cost would remain he same whether we produce starters or purchase staters.
Total relevant cost per unit if starters are made inside the company : Total product cost - Depreciation - Rent
$13.10 - $1.10 - $0.30 = $11.70 per unit.
Answer 2)
Total relevant cost per unit if staters are purchased from outside supplier : Purchase price = $12.40 per unit.
Answer 3)
Total units of starters in consideration : we can calulate number of units to produce by taking the base of supervision cost or rent or derpreciation given in question . By using supervision cost, we get = $80,000 / $1.60 = 50,000 units.
Increse or decrease in profit as a result of purchasing the starters rather then making them :
= ($11.70 - $12.40 ) 50,000 units = $35,000 per unit.
Profit would decrease by $35,000 per period
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