Question

Futura Company purchases the 73,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.00 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 $12.20 as shown below Per Total Unit $ 5.00 Direct materials Direct labor 3.20 2.00 $146,000 1.40 $102,200 Supervision Depreciation Variable manufacturing overhead 0.30 Rent 0.30 21,900 $12.20 Total product cost If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $146,000) 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 $83,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 73,000 starters instead of buying them from an outside supplier?

Answer 1

	Per unit		Total 73000 units
	Make	Buy	Make	Buy
Direct materials	5.00		365000
Direct labor	3.20		233600
Variable manufacturing overhead	0.30		21900
Supervision	2.00		146000
Purchase cost		11.00		803000
Total			766500	803000
Difference in favor of making = 766500-803000 = $36500
Financial advantage 36500