The first box has a drop down menu with the choice between \"Financial advantage

Question

The first box has a drop down menu with the choice between "Financial advantage" and "Financial (Disadvantage)"

Futura Company purchases the 78,000 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 $12.60 as shown below: Per UnitTotal $ 5.00 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 3.50 1.60 $124,800 1.50 ?117,000 0.60 .40 31,200 Total product cost $ 12.60 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $124,800) 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 $83,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required What is the financial advantage (disadvantage) of making the 78,000 starters instead of buying them from an outside supplier?

Explanation / Answer

Differential analysis :

Financial advantage of making the 78000 starters instead of buying the from outside supplier is 70200

Make Buy Direct material 390000 Direct labour 273000 Supervision 124800 Variable manufacturing overhead 46800 Purchase cost (78000*11.60) 904800 Total 834600 904800

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