Question

Exercise 12-10 Make or Buy Decision (LO12-3] Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $8.90 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 $9.60 as shown below: Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 4.00 2.00 1.80 1.00 0.40 0.40 $ 9.60 $ 124, 200 $ 69,000 $ 27,600 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $124,200) 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 $83,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 69,000 starters instead of buying them from an outside supplier?

Answer 1

	Per unit		Total 69000 units
	Make	Buy	Make	Buy
Direct materials	4.00		276000
Direct labor	2.00		138000
Variable manufacturing overhead	0.40		27600
Supervision	1.80		124200
Purchase cost		8.90		614100
Total			565800	614100
Difference in favor of making = 565800-614100 = $48300
Financial advantage 48300