Question

Futura Company purchases the 68,000 starters that it Installs in its standard line of farm tractors from a supplier for the price of $11.10 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 chlef engineer is opposed to making the starters because the production cost per unit is $12.00 as shown below: Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 5.00 2.80 1.82 1.50 $ 122,400 $ 102,000 $ 40,800 0.60 $ 12.00 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $122,400) 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 $84,000 per perlod. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 68,000 starters Instead of buying them from an outside supplier?

Answer 1

Statement showing calculation of Manufactung lost Units 68,000 Total Cost :- Per unit Total 3,40,000 190,400 122,000 Diect Material 5.00 Direct labour 2.80 supervision 1280 Depreciation Variable Manufacturing overhead 0.30 Rent Relevant Total cost (A) $9.9 Purchase Cost from (B) $11.10 suppliu do 400 $673,200 $754,800 Advantage in Manufacturing (B-A) $1.2 per unit $81,600 1) Notes :- Depreciation & Rent are irelevant as these are fixed in nature & will be incurred irrespective of whether starters are purchased or manufa- - ctured. Supervisor is hired only if states all manufactured Therefore $ 122,400 Supervisor Salaly is belevant. 21

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