For many years Futura Company has purchased the starters that it installs in its
ID: 2591362 • Letter: F
Question
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 55,000 starters needed would be greater than the current $11.70 per unit purchase price: Per UnitTotal $ 7.00 Direct materials Direct labor Supervision 2.00 1.50 S 82,500 1.40 S 77,000 0.70 0.30 16,500 Variable manufacturing overhead Rent Total product cost $12.90 A supervisor would have to be hired to oversee production of the starters. However, the company has sulficient idle tools and machinery so 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 s due to obsolescence rather than wear and tear Required: 1. Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.) 2. Determine the total relevant cost per unit if starters are purchased from an outside supplier. your answer to 2 decimal places) 3. What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)Explanation / Answer
Question 1). Solution :- Relevant cost per unit (When starters are made in company) = Direct material + Direct labor + Supervision + Variable manufacturing overhead.
= 7.00 + 2.00 + 1.50 + 0.70
= $ 11.20
Conclusion :- Relevant cost per unit (When starters are made inside the company) = $ 11.20
Note :- Depreciation will not be considered in the calculation of relevant cost of making (producing) the starters whereas Supervision cost is to be considered in the calculation of relevant cost per unit because supervision is carried out especially for overseeing & regulating the production of starters in the company.
Question 2). Answer :-
Relevant cost per unit (When the starters purchased through outside supplier) = $ 11.70
Question 3). Solution :-
Decrease / Fall in profits (if starters are purchased through outside supplier rather than produced in the company) = 55000 * (11.70 - 11.20)
= 55000 * 0.50
= $ 27,500.
Conclusion :- The profits of company will decrease by $ 27,500 if the starters are purchased from outside supplier rather than produced inside the company.
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