Futura Company purchases the 79,000 starters that it installs in its standard li
ID: 2559678 • Letter: F
Question
Futura Company purchases the 79,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.20 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 $12.50 as shown below: Per Unit Total Direct materials $ 7.00 Direct labor 2.20 Supervision 1.50 $ 118,500 Depreciation 1.20 $ 94,800 Variable manufacturing overhead 0.50 Rent 0.30 $ 23,700 Total product cost $ 12.50 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $118,500) 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 94,800 starters instead of buying them from an outside supplier?
Explanation / Answer
The financial advantage of making the 94800 starters instead of buying from outside supplier :
There is a advantage in making the starter as
1) The company is having excess capacity to produce the starter.
2) The depreciation cost is nit while making the starter being the sunk cost whether the starter produced or bought from supplier.
3) The total applicable cost per starter to produce is $11.25.
Thus, it would be advantageous to make the 94800 starters instead of buying them from an outside supplier.
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Cost : Cost per starter Direct Material $7 Direct Labor 2.20 Supervision 118500 / 94800 = 1.25 Depreciation 0 being sunk cost Variable manufacturing overhead 0.50 Rent 0.30 Total making cost per starter $11.25Related Questions
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