Futura Company purchases the 50,000 starters that it installs in its standard li

Question

Futura Company purchases the 50,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.60 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 $11.00 as shown below: Per Unit 5.00 2.80 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 1.60$ 80,000 50,000 1.00 0.30 0.30 11.00 15,000 Total product cost If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $80,000) 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 $90,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 50,000 starters instead of buying them from an outside supplier?

Explanation / Answer

calculation of the advantage or disadvantage from making 50000 starters relevant costs for manufacturing per unit particulars costs 1 direct materials 5 2 direct labour 2.8 3 supervision 1.6 4 variable manufacturing overheads 0.3 5 total cost per unit ( 1 + 2 + 3 + 4 ) 9.7 the depreciation and rents costs should not be considered as these will not change due to the manufacture cost of procurement units * purchase per unit 50000 * 10.60 530000 cost of manufacture units * manufacturing cost per unit 50000 * 9.70 485000 financial advantage of manufacturing 50000 cost of procurement - cost of manufacture 530000 - 485000 45000

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