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?
Profits would:
By: per period
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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