Futura Company purchases the 66,000 starters that it installs in its standard li

Question

Futura Company purchases the 66,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.60 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 $12.30 as shown below Per Unit Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 5.00 3.50 1.60 $105,600 1.10 72,600 0.60 ???0 39,600 Total product cost 12.30 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $105,600) 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 $88,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 66,000 starters instead of buying them from an outside supplier? inancial advantage

Explanation / Answer

the following is the comparitive make or buy analysis:

financial advantage of making instead of buying the starters = $765,600 - $706,200 =>$59,400.

note: depreciation is not relevant since it is for obsolescence rather than wear and tear.

rent is based on space utilised, so it is not relevant, since the machine is already existing one and not a new one.

make Buy per unit total (66,000 units) per unit total (66,000 units) Purchase cost nil nil $11.60 $765,600 direct materials $5.00 $330,000 nil nil direct labour $3.50 $231,000 nil nil supervision $1.60 $105,600 nil nil variable manufacturing overhead $0.60 $39,600 nil nil total $10.70 $706,200 $11.60 $765,600

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