Exercise 12-10 Make or Buy Decision [L012-3] Futura Company purchases the 40,000

Question

Exercise 12-10 Make or Buy Decision [L012-3] Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $8.40 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 $9.20 as shown below Direct material: Direct labor Supervision Depreciation Variable manufacturing overhead Rent $ 3.10 2.70 1.50 66,000 1.80 48,000 0.60 8.30 12,008 $ 9.20 Total product cost If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than wear and tear. 0 Required What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier?

Explanation / Answer

Per unit 40000 units Make Buy Make Buy Direct materials 3.1 124000 Direct labor 2.7 108000 Variable manufacturing overhead 0.6 24000 Supervision 1.5 60000 Purchase cost 8.4 336000 Total cost 316000 336000 Financial advantage = $20000(336000-316000)

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.