Futura Company purchases the 61,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.10 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 $12.00 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ Total 6.00 2.20 1.90 1.20 0.40 0.30 $ 12.00 $ 115,900 73,200 S $ 18,300 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,900) 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 61,000 starters instead of buying them from an outside supplier?
Futura Company purchases the 61,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.10 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 $12.00 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ Total 6.00 2.20 1.90 1.20 0.40 0.30 $ 12.00 $ 115,900 73,200 S $ 18,300 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,900) 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 61,000 starters instead of buying them from an outside supplier?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Futura Company purchases the 61,000 starters that it installs in its standard line of farm tractors from a supplier for the
price of $11.10 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 $12.00 as shown below:
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing
overhead
Rent
Total product cost
Per
Unit
Total
$ 6.00
2.20
$ 115,900
1.20 $ 73,200
1.90
0.40
0.30
$ 12.00
$ 18,300
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,900) 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 61,000 starters instead of buying them from an outside
supplier?
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