Futura Company purchases 80,000 starters from a supplier at $9.90 per unit that it installs in farm tractors. Due to a reduction inoutput, the company now has enough idle capacity to produce the starters rather than buying them from the supplier. However, thecompany's chief engineer is opposed to making the starters because the production cost per unit is $10.80, as shown below:Direct materialsDirect laborSupervisionDepreciationVariable manufacturing overheadPer UnitTotal$ 4.002.201.90$ 152,0001.50$ 120,0000.700.50$ 10.80$ 40,000RentTotal product costIf Futura decides to make the starters, a supervisor would be hired (at a salary of $152,000) to oversee production. However, thecompany has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above isbased on space utilized in the plant. The total rent on the plant is $87,000 per period.Required:What is the financial advantage (disadvantage) of making the 80,000 starters instead of buying them from an outside supplier?Financial advantage

Variable cost means the cost which vary with the level of output where as fixed cost remain fixed…

Answered: Futura Company purchases 80,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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