For many years Futura Company has purchased the starters that it installs in its
ID: 2456863 • 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 per unit cost to produce the 60,000 starters needed would be greater than the current $15.20 per unit purchase price:
Direct materials: 5.00 per unit
Direct labor: 3.00 per unit
Supervision: 1.80 per unit; Total 108,000
Deprectation: 1.40 per unit; Total 84,000
Variable Manufacturing Overhead: .50 per unit
Rent: .40 per unit; Total 24,000
Total Production Cost = 12.10 per unit
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 $81,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.)
Relevant Cost per unti: ____________
2. Determine the total relevant cost per unit if starters are purchased from an outside supplier.(round your answers to 2 decimal places).
Relevant 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.)
Profit would ____________ by ______________ per period.
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 60,000 starters needed would be greater than the current $15.20 per unit purchase price:
Explanation / Answer
Here no calculations are required. All the costs are given in the question itself.
So the Relevant cost per unit to produce the starters inside the company is $12.10
2. The current per unit purchase price is $ 15.20
So the Relevant cost per unit if starters are purchased from outside supplier it is $15.20
3. Assuming 60,000 units are produced or purchased per period, then the production cost is $12.10 * 60,000 = $726,000 and Purchase cost is $15.20 * 60,000 = $912,000
The difference between purchase cost and production cost is $ 912,000 - $726,000 = $186,000. As there is more cost to be incurred to purchase product from outside supplier, profit will decrease by that amount.
Hence Profit would decrease by $186,000 per period.
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