Question

Futura Company purchases the 67,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.50 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 $12.80 as shown below: Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 6.00 3.20 1.80 1.00 0.30 0.50 $ 12.80 $120,600 $ 67,000 $ 33,500 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $120,600) 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 $87,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 67,000 starters instead of buying them from an outside supplier? ........................

Answer 1

Answer: Financial advantage : Profit would Increase by $80400

Calculated as

Depreciation and rent both are irrelevant for this decision

Cost of Making the product
	Units		Make Per Unit	Make Total
Direct Material	67000	x	$       6.00	$          402,000
Direct Labor	67000	x	$       3.20	$          214,400
Variable overhead	67000	x	$       0.30	$             20,100
Supervision				$          120,600
Relevant Total Cost of Making				$          757,100
Cost of Buying Product	67000	x	$    12.50	$          837,500
Financial advantage				$             80,400