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 $17.20 per unit purchase price: Per Unit Total Direct materials $ 6.00 Direct labor 2.50 Supervision 1.70 $ 110,500 Depreciation 1.20 $ 78,000 Variable manufacturing overhead 0.60 Rent 0.50 $ 32,500 Total product cost $ 12.50 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 $89,000 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.) 2. Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.) 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.)

Explanation / Answer

Units 65000 Particulars Cost/Unit Total Relevant/Irrelevant Reason D Material 6 390000 R Relevant cost asrequired for Production D Labor 2.5 162500 R Relevant cost asrequired for Production Supervision 1.7 110500 R Relevant cost asrequired for Production Depreciation 1.2 78000 IR Due to obsolecence, Not relevant cost V Oh 0.6 39000 R Relevant cost asrequired for Production Rent 0.5 32500 R Relevant cost asrequired for Production If Produced, relevant cost/unit 11.3 812500 If Purchases from market 17.5 Loss if Purchased from market 6.2 Total Variable cost Loss 403000 Add Aditional Rent Paid 57000 Deprecation 78000 Total Decrease in profit if Purchased 538000

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