C https://n Exercise 12-10 (Similar) (6 pt) Futura Company purchases the 66,000

Question

C https://n Exercise 12-10 (Similar) (6 pt) Futura Company purchases the 66,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $1100 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 production cost per unit is $1110 as shown below points $ $.00 Direct labor 2.20 1.58 $ 99,000 1.10 $ 72,609 0.80 a.se $ 33,8e0 Depreciation Variable manufacturing overhead Total product c©st If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $99,000) 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 S89000 per period Depreciation is due to obso escence rather than wear and tear Reterences Required: What is the financial advantage (disadvantage) of making the 66,000 starters instead of buying them from an outside supplier?

Explanation / Answer

first let us make an incremental analysis:

There is a financial advantage of ($726,000 - 627,000) =>$99,000 on making 66,000 starters.

note: rent and depreciation are not relevant here since they are incurred in either case.

Make Buy Per unit Total (66,000units) Per unit TOtal (66,000 units) DIrect materials $5.00 $330,000 nil nil Direct labour $2.20 $145,200 nil nil Supervision $1.50 $99,000 nil nil variable overhead $0.80 $52,800 nil nil Purchase price nil nil $11.00 $726,000 Total $9.50 $627,000 $11.00 $726,000

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