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Futura Company purchases the 65,000 starters that it installs in its standard line of farm tractors from a supplier for the p
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Answer #1

Calculation of Financial Advantage/Disadvantage of making the 65,000 starters instead of buying them from an outside supplier:

1. Cost of starters from outside supplier = 65,000*$12.5 = $812,500

2. Cost of starters when produced inhouse:

Particulars Amount ($) Comments
Direct Material        4,55,000 Relevant for decision-making
Direct Labor        1,43,000 Relevant for decision-making
Supervision        1,04,000 Relevant for decision-making because if starters are not produced inhouse, supervisor would not be required to be hired and hence it is an avoidable cost
Depreciation                   -   Fixed Cost, not relevant for decision-making
Variable Manufacturing Overheads           19,500 Relevant for decision-making
Rent                   -   Fixed Cost, not relevant for decision-making
Total Cost of producing Starters      7,21,500

3. Therefore, financial advantage of producing starters = $812,500 - $7,21,500 = $91,000

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