EXERCISE 13-19 Make or Buy Decision LO13-3 Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $8.40 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 $9.20 as shown below: Direct materials... Direct labor... Supervision Depreciation... Variable manufacturing overhead. Rent ..... Total production cost.. Per Unit $3.10 2,70 1.50 1.00 0.60 0.30 $9.20 Total $60,000 $40,000 $12,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier?
EXERCISE 13-19 Make or Buy Decision LO13-3 Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $8.40 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 $9.20 as shown below: Direct materials... Direct labor... Supervision Depreciation... Variable manufacturing overhead. Rent ..... Total production cost.. Per Unit $3.10 2,70 1.50 1.00 0.60 0.30 $9.20 Total $60,000 $40,000 $12,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier?
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Transcribed Image Text:EXERCISE 13-19 Make or Buy Decision LO13-3
Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors
from a supplier for the price of $8.40 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 $9.20 as shown below:
Direct materials....
Direct labor.
Supervision...
Depreciation
Variable manufacturing overhead
Rent...
Total production cost
Per Unit
$3.10
2.70
1.50
1.00
0,60
0.30
$9.20
Total
$60,000
$40,000
$12,000
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of
$60,000) 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 $80,000 per period. Depreciation is due to
obsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying
them from an outside supplier?
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