Futura Company purchases the 70,000 starters that it installs inits standard line of farm tractors from a supplier for the price of$12.60 per unit. Due to a reduction in output, the company now hasidle capacity that could be used to produce the starters ratherthan buying them from an outside supplier. However, the companyâschief engineer is opposed to making the starters because theproduction cost per unit is $12.90 as shown below:
Per Unit Total Direct materials $ 6.00 Direct labor 3.00 Supervision 1.90 $ 133,000 Depreciation 1.10 $ 77,000 Variable manufacturingoverhead 0.60 Rent 0.30 $ 21,000 Total product cost $ 12.90
If Futura decides to make the starters, a supervisor would haveto be hired (at a salary of $133,000) to oversee production.However, the company has sufficient idle tools and machinery suchthat no new equipment would have to be purchased. The rent chargeabove is based on space utilized in the plant. The total rent onthe plant is $88,000 per period. Depreciation is due toobsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the70,000 starters instead of buying them from an outsidesupplier?
Futura Company purchases the 70,000 starters that it installs inits standard line of farm tractors from a supplier for the price of$12.60 per unit. Due to a reduction in output, the company now hasidle capacity that could be used to produce the starters ratherthan buying them from an outside supplier. However, the companyâschief engineer is opposed to making the starters because theproduction cost per unit is $12.90 as shown below:
| Per Unit | Total | |||||
| Direct materials | $ | 6.00 | ||||
| Direct labor | 3.00 | |||||
| Supervision | 1.90 | $ | 133,000 | |||
| Depreciation | 1.10 | $ | 77,000 | |||
| Variable manufacturingoverhead | 0.60 | |||||
| Rent | 0.30 | $ | 21,000 | |||
| Total product cost | $ | 12.90 | ||||
If Futura decides to make the starters, a supervisor would haveto be hired (at a salary of $133,000) to oversee production.However, the company has sufficient idle tools and machinery suchthat no new equipment would have to be purchased. The rent chargeabove is based on space utilized in the plant. The total rent onthe plant is $88,000 per period. Depreciation is due toobsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the70,000 starters instead of buying them from an outsidesupplier?
Related questions
| 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 70,000 starters needed would be greater than the current $13.20 per unit purchase price: |
| Per Unit | Total | |||
| Direct materials | $ | 7.00 | ||
| Direct labor | 3.20 | |||
| Supervision | 1.50 | $ | 105,000 | |
| Depreciation | 1.30 | $ | 91,000 | |
| Variable manufacturing overhead | 0.70 | |||
| Rent | 0.40 | $ | 28,000 | |
| Total product cost | $ | 14.10 | ||
| 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 $84,000 per period. Depreciation is due to obsolescence rather than wear and tear.
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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 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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