Futura Company purchases 79,000 starters from a supplier at $11.30 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 $12.30, as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 5.00 3.50 2.00 1.20 0.30 0.30 $ 12.30 Total $ 158,000 $ 94,800 $ 23,700 If Futura decides to make the starters, a supervisor would be hired (at a salary of $158,000) 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 $85,000 per period. Required: What is the financial advantage (disadvantage) of making the 79,000 starters instead of buying them from an outside supplier?
Futura Company purchases 79,000 starters from a supplier at $11.30 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 $12.30, as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 5.00 3.50 2.00 1.20 0.30 0.30 $ 12.30 Total $ 158,000 $ 94,800 $ 23,700 If Futura decides to make the starters, a supervisor would be hired (at a salary of $158,000) 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 $85,000 per period. Required: What is the financial advantage (disadvantage) of making the 79,000 starters instead of buying them from an outside supplier?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter17: Activity Resource Usage Model And Tactical Decision Making
Section: Chapter Questions
Problem 18E: A company is considering a special order for 1,000 units to be priced at 8.90 (the normal price...
Related questions
Question
Munabhai
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub