Question

Futura Company purchases the 65,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.30 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 $12.30 as shown below Per Unit $ 6.00 Total Direct materials Direct labor 2.80 1.70 $110,500 1.00 65,000 Supervision Depreciation Variable manufacturing overhead 0.50 0.30 19,500 Rent $12.30 Total production cost If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $110,500) 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 $89,000 per period. Depreciation is due to obsolescence rather than wear and tear Required: What is the financial advantage (disadvantage) of making the 65,000 starters instead of buying them from an outside supplier?

Answer 1

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ANS: Amount in $ + Financial advantage of making the 65000 Starters instead of buying them from an outside supplieno $ 84,500 Workiggs ay purchase cost of 65.000 Starters (65000 K$12:34:$799500 (b) Calculation of pou duetian_cost of 65000 starters; ___ per unit | Total I cos Direct material $ 6.00 $ 390000 c) Die labort $ 2.80 $ 182000 (In) Supervision $ 1.40 $ 1.10500 (IV) Variable manufacturing overhead 1 $0.50 $ 32500 $11.00 $ 715000 - Hence, the financial advantage is (a-b) = $84500

A Depreciation is a inrelevant Non-eash enpenses, Hence 007 - relevant in Make or buy decé sing a * Rent is also a irrererant cost, as of a plant does not allow termination of the lease period (committed cost) the mental enpense until the end

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