Question

Futura Company purchases the 78,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.20 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 $13.50 as shown below: Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 6.00 3.50 1.70 1.10 0.70 0.50 $ 13.50 $ 132,600 $ 85,800 $ 39,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $132,600) 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 $89,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 78,000 starters instead of buying them from an outside supplier?

Answer 1

	Cost of buying	Cost of making	Increase/Decrease income
Outside supplier expense	78,000 x 13.2 = 1,029,600	0	1,029,600
Direct material	0	78,000 x 6 = 468,000	-468,000
Direct labor	0	78,000 x 3.5 = 273,000	-273,000
Supervision	0	132,600	-132,600
Depreciation	85,800	85,800	0
Variable manufacturing overhead	0	78,000 x 0.70 = 54,600	-54,600
Rent	89,000	89,000	0
Total cost	$1,124,300	$1,103,000	$21,300

Financial advantages of making 78,000 starters = $21,300

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