For many years Futura Company has purchased the starters that it installs in its

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 $12.90 per unit purchase price Per Unit $ 6.00 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 3.50 1.80 $ 99,000 1.10 60,500 0.80 0.40 $ 22,000 Total product cost $13.60 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient 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 $89,000 per period. Depreciation is 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.) Relevant cost per unit

Explanation / Answer

Relevant cost is the cost which varies with the decision making.

So as per the given data following is relevant cost.

1. Direct materials per unit= $ 6 (relevant cost)

Direct labour per unit = $ 3.5 (relevant cost) Supervision per unit. = $ 1. 8(relevant cost)

Depreciation = $ 0 (irrelevant cost)

Variable manufacturing

overhead per unit = $ 0.8(relevant cost)

Rent per unit

($ 89000/55000) =$ 1.62

Total cost per unit.   $ 13.72

2. If purchased relevant cost per unit = $ 12.9

3. Increases profit per unit if purchased from outside

= $ 13.72- $12.9

=$ 0.82

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