For many years Futura Company has purchased the starters that it installs in its
ID: 2461293 • 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 40,000 starters needed would be greater than the current $8.40 per unit purchase price:
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 $80,000 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.)
Determine the total relevant cost per unit if starters are purchased. (Round your answer to 2 decimal places.)
What is the increase or decrease in profits as a results of purchasing the parts from the starters rather than making them inside the company? (Do not round intermediate calculations.)
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 40,000 starters needed would be greater than the current $8.40 per unit purchase price:
Explanation / Answer
Solution:
1)
Calculation of the total relevant cost per unit if starters are made inside the company
$ Per unit
Direct Material
$3.10
Direct Labor
$2.70
Supervision
$1.50
Variable Manufacturing Overhead
$0.60
Total Relevant Product Cost
$7.90
Notes:
Depreciation and Rent Expenses is not relevant cost. Since it is to be incurred and fixed in nature whether company produce starters or not these cost will incur. Hence it is to be ignored.
Supervision Charges assumed that the Supervision charges for oversee production of starters. Hence it is relevant for decision making.
2) Total Variable Cost if Starters are purchased from outside = $8.40 Per Unit
3)
Decrease in profit by $0.50 per unit ($8.40 - $7.90) if starters are purchased from outside instead of making them inside the company.
Total Decrease in Profit = $0.50 x 40,000 Starters = $20,000
$ Per unit
Direct Material
$3.10
Direct Labor
$2.70
Supervision
$1.50
Variable Manufacturing Overhead
$0.60
Total Relevant Product Cost
$7.90
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