Question

For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 60,000 starters needed would be greater than the current $9.40 per unit purchase price: Total Total Per Unit $ 4.00 3.00 1.60 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent $ 96,000 $ 66,000 1.10 0.50 0.30 $ 18,000 Total product cost $ 10.50 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery so 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 $85,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: 1. Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.) Relevant cost per unit 2. Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.) Relevant cost per unit 3. What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Profit would by per period

Answer 1

ANSWER

Req 1:
Reelevant cost of making the Starters
Directc material			4
labour			3
Supervision			1.6
Variable manufacturing cost			0.5
Relevant cost of manufacturing			9.10	per unit
Req 2:
Relevant cost of purchasing the starters				9.40 per unit
Req 3:
Net financial advantage / Disadvantage of Purchase
Cost of purchasing (60,000*9.40 )					-564,000
Les: Relevant of manufacture (60,000*9.10)					546,000
Net financial disadvantage					-18,000
Profit would decrease by $18,000 per period

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