For many years Futura Company has purchased the starters that itinstalls in its standard line of farm tractors. Due to a reductionin output, the company has idle capacity that could be used toproduce the starters. The chief engineer has recommended againstthis move, however, pointing out that the per unit cost to producethe 55,000 starters needed would be greater than the current $15.40per unit purchase price:
Per Unit Total Directmaterials $ 6.00 Direct labor 2.00 Supervision 1.70 $ 93,500 Depreciation 1.10 $ 60,500 Variablemanufacturing overhead 0.70 Rent 0.60 $ 33,000 Total productcost $ 12.10
A supervisor would have to be hired to oversee production of thestarters. However, the company has sufficient idle tools andmachinery so that no new equipment would have to be purchased. Therent charge above is based on space utilized in the plant. Thetotal rent on the plant is $89,000 per period. Depreciation is dueto obsolescence rather than wear and tear.
1. Determine the total relevant cost per unit if starters are madeinside the company.
2. Determine the total relevant cost per unit if starters arepurchased from an outside supplier
3. What is the increase or decrease in profits as a result ofpurchasing the starters from an outside supplier rather than makingthem inside the company
For many years Futura Company has purchased the starters that itinstalls in its standard line of farm tractors. Due to a reductionin output, the company has idle capacity that could be used toproduce the starters. The chief engineer has recommended againstthis move, however, pointing out that the per unit cost to producethe 55,000 starters needed would be greater than the current $15.40per unit purchase price: |
| Per Unit | Total | |||
| Directmaterials | $ | 6.00 | ||
| Direct labor | 2.00 | |||
| Supervision | 1.70 | $ | 93,500 | |
| Depreciation | 1.10 | $ | 60,500 | |
| Variablemanufacturing overhead | 0.70 | |||
| Rent | 0.60 | $ | 33,000 | |
| Total productcost | $ | 12.10 | ||
| A supervisor would have to be hired to oversee production of thestarters. However, the company has sufficient idle tools andmachinery so that no new equipment would have to be purchased. Therent charge above is based on space utilized in the plant. Thetotal rent on the plant is $89,000 per period. Depreciation is dueto obsolescence rather than wear and tear.
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Related questions
For many years Futura Company has purchased the starters that itinstalls in its standard line of farm tractors. Due to a reductionin output, the company has idle capacity that could be used toproduce the starters. The chief engineer has recommended againstthis move, however, pointing out that the per unit cost to producethe 60,000 starters needed would be greater than the current $18.00per unit purchase price:
| Per Unit | Total | |||
| Directmaterials | $ | 7.00 | ||
| Directlabor | 2.80 | |||
| Supervision | 1.80 | $ | 108,000 | |
| Depreciation | 1.40 | $ | 84,000 | |
| Variablemanufacturing overhead | 0.70 | |||
| Rent | 0.40 | $ | 24,000 | |
| Total productcost | $ | 14.10 | ||
A supervisor would have to be hired to oversee production of thestarters. However, the company has sufficient idle tools andmachinery so that no new equipment would have to be purchased. Therent charge above is based on space utilized in the plant. Thetotal rent on the plant is $87,000 per period. Depreciation is dueto obsolescence rather than wear and tear. |
| Required: |
| Determine the total relevant cost per unit if starters are madeinside the company. Determine the total relevant cost per unit if starters arepurchased from an outside supplier. What is the increase or decrease in profits as a result ofpurchasing the starters from an outside supplier rather than makingthem inside the company?
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For many years Futura Company has purchased the starters that itinstalls in its standard line of farm tractors. Due to a reductionin output, the company has idle capacity that could be used toproduce the starters. The chief engineer has recommended againstthis move, however, pointing out that the per unit cost to producethe 65,000 starters needed would be greater than the current $9.10per unit purchase price: |
| Per Unit | Total | |||
| Directmaterials | $ | 4.00 | ||
| Direct labor | 2.50 | |||
| Supervision | 1.40 | $ | 91,000 | |
| Depreciation | 1.20 | $ | 78,000 | |
| Variablemanufacturing overhead | 0.40 | |||
| Rent | 0.40 | $ | 26,000 | |
| Total productcost | $ | 9.90 | ||
A supervisor would have to be hired to oversee production of thestarters. However, the company has sufficient idle tools andmachinery so that no new equipment would have to be purchased. Therent charge above is based on space utilized in the plant. Thetotal rent on the plant is $90,000 per period. Depreciation is dueto obsolescence rather than wear and tear. |
| Required: |
| 1. | Determine the total relevant cost per unit if starters are madeinside the company. (Round your answer to 2 decimalplaces.) |
| 2. | Determine the total relevant cost per unit if starters arepurchased from an outside supplier. (Round your answer to 2decimal places.) |
| 3. | What is the increase or decrease in profits as a result ofpurchasing the starters from an outside supplier rather than makingthem inside the company? (Do not round intermediatecalculations. Round your answer to the nearest dollaramount.) |
