Question

Tell me what you want to do Help Add-ins w View AaBbCcDd AaBbCcDd AaBbC AaBbCcE AaB AaB 1 No Spac... Title Su 1 Normal Heading 1 Heading 2 Paragraph Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $8.40 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 $9.20 as shown below: Per Unit Total 3.10 2.70 1.50 $60, 000 1.00 $40, 000 0.60 Direct materials Difect labor Supervision Depreciation Variable manufacturing overhead Rent Total production cost 0.30 $12,000 9.20 I If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier? (Ctrl) W

Answer 1

Solution:

Total cost by self manufacturing of per unit of startes:  

Direct material : 3.10

Direct Labor : 2.70

Supervision : 1.50

Variable matufacturing overhead:   0.60

Rent : 0.30

Total 8.20

Note: Depriciation would not be considered as it is because to obsolescence.

whereas per unit cost of starter if purhcase from the supplier: $8.40

So there is financial advantage of $0.20 per unit and on 40000 units its of 0.20 x 40000: $8000