Help Save& Exit Submit Check my work Futura Company purchases the 61,000 starter

Question

Help Save& Exit Submit Check my work Futura Company purchases the 61,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.70 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 $12.20 as shown below Direct materials Direct labor Supervision Depreciation Variable manufacturing overheed 6.00 2.50 1.70 $103,700 1.40 85.400 Total produet eost 9.30 18,300 $12.20 to make the starters, a supervisor would have to be hired (at a salary of $103,700) 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 $82,000 per period. Depreciation is due to obsolescence rather than wear and tear Required: What is the financial ial advantage (disadvantage) of making the 61000 starters instead of buying them from an outside supplier? advantage ?Prev 2016 ??? Next > MacBook Air FS Fs F7 PD FB F9 FVO FY 92

Explanation / Answer

Per unit financial advantage of making = 11.70-10.90 = $0.80

Total financial advantage on 61000 units = 61000*0.80 = $48,800.00

Additional cost of making the starters: Particulars Per unit Reason for exclusion Direct materials                  6.00 Direct labor                  2.50 Supervision                  1.70 Depreciation                      -   Depreciation charge is not additional expense which would be incurred only when the starters are made. They will be charged even if purchased from outside. Variable M.OH                  0.70 Rent                      -   Rent expenses are allocated costs, which will be incurred even if the starters were not produced inhouse. Per unit cost of making               10.90

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