Futura Company purchases 66,000 starters from a supplier at $9.80 per unit that it installs in farm tractors. Due to a reduction in output, the company now has enough idle capacity to produce the starters rather than buying them from the supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $10.20, as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 4.00 2.50 1.80 1.20 0.30 0.40 $ 10.20 Total $ 118,800 $ 79,200 $ 26,400 f Futura decides to make the starters, a supervisor would be hired (at a salary of $118,800) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased.
Futura Company purchases 66,000 starters from a supplier at $9.80 per unit that it installs in farm tractors. Due to a reduction in output, the company now has enough idle capacity to produce the starters rather than buying them from the supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $10.20, as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 4.00 2.50 1.80 1.20 0.30 0.40 $ 10.20 Total $ 118,800 $ 79,200 $ 26,400 f Futura decides to make the starters, a supervisor would be hired (at a salary of $118,800) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Futura Company purchases 66,000 starters from a supplier at $9.80 per unit that it installs in farm tractors. Due to a
reduction in output, the company now has enough idle capacity to produce the starters rather than buying them from the
supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is
$10.20, as shown below:
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing overhead
Rent
Total product cost
Per Unit
$ 4.00
2.50
1.80
1.20
0.30
0.40
$ 10.20
Total
$ 118,800
$ 79,200
$ 26,400
If Futura decides to make the starters, a supervisor would be hired (at a salary of $118,800) 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 $82,000 per period.
Required:
What is the financial advantage (disadvantage) of making the 66,000 starters instead of buying them from an outside
supplier?
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