For many years Futura Company has purchased the starters that it installs in its
ID: 2744785 • 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 m output the company has Kite capacity that could be used to produce the starters. The chief engineer has recommended against the move, however, pointing out that the per unit cost to produce the 70,000 starters needed would be greater than the current $17.70 per unit purchase price: A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient die tools and machinery so that no new equipment would have to be purchased. The rent charge above is based on space utilized m the plant. The total rent on the plant is $82,000 per period Deprecation is due to obsolescence rather than wear and tear. Determine the total relevant cost per unit if starters are made inside the company (Round your answer to 2 decimal places.) Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.) 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
1. Total relevant cost if the starters are made indide the company = Direct material + Direct labor + Supervision + Variable manufacturing overhead = $ ( 7.00 + 2.20 + 1.80 + 0.60) = $ 11.6 per starter
( Rent and depreciation are neither direct expenses nor avoidable expenses, and hence are not relevant.)
2. Total relevant cost per unit if the starters are purchased from an outside supplier would be $ 17.70.
3. Profits would decrease by $ ( 17.70 - 11.60) x 70,000 = $ 427,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.