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 Per Unit Total $3.10 2.70 1.50 $60,000 1.00 $40,000 0.60 Total production cost 0.30 $12,000 $9.20 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.
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 Per Unit Total $3.10 2.70 1.50 $60,000 1.00 $40,000 0.60 Total production cost 0.30 $12,000 $9.20 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text: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
Per Unit Total
$3.10
2.70
1.50
$60,000
1.00 $40,000
0.60
Total production cost
0.30 $12,000
$9.20
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.
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