Exercise 12-10 Make or Buy Decision [LO12-3) Futura Company purchases the 71,000
ID: 2592901 • Letter: E
Question
Exercise 12-10 Make or Buy Decision [LO12-3) Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.60 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 $10.70 as shown below: 50 points Per Unit Total $ 5.00 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 2.00 1.70 $120,700 1.40 $ 99,400 0.60 0.40 28,400 eBook Total product cost $10.70 Print If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $120,700) 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 $85,000 per period. Depreciation is due to obsolescence rather than wear and tear References Required What is the financial advantage (disadvantage) of making the 99,400 starters instead of buying them from an outside supplier?Explanation / Answer
Note : While calculating cost per unit of manufacturing straters both rent & depreciation are not to be consider as thery are regular fixed cost & are not incurred solely for manufacturing straters .
Therefore correct cost per unit for making strater = Total product cost (given) - Rent - Depreciation
= $10.70 - $0.40 - $1.40 = $8.90
Buying cost of per unit of strater = $10.60 (given)
Financial advantage of making 99,400 units of starters instead of buying them
= ($10.60 - $8.90) * 99,400 units = $168,980 Advantage
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