Futura Company purchases the 68,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.50 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 $11.30 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit Total $ 5.00 2.50 1.90 $ 129,200 1.10 $ 74,800 0.50 0.30 $ 20,400 $ 11.30 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $129,200) 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 $84,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 68,000 starters instead of buying them from an outside supplier?
Futura Company purchases the 68,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.50 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 $11.30 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit Total $ 5.00 2.50 1.90 $ 129,200 1.10 $ 74,800 0.50 0.30 $ 20,400 $ 11.30 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $129,200) 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 $84,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 68,000 starters instead of buying them from an outside supplier?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
None
Transcribed Image Text:Futura Company purchases the 68,000 starters that it installs in its standard
line of farm tractors from a supplier for the price of $10.50 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 $11.30 as shown below:
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing overhead
Rent
Total product cost
Per Unit
$ 5.00
Total
2.50
1.90
$ 129,200
1.10
$ 74,800
0.50
0.30
$ 20,400
$ 11.30
If Futura decides to make the starters, a supervisor would have to be hired
(at a salary of $129,200) 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 $84,000 per period. Depreciation is due
to obsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 68,000
starters instead of buying them from an outside supplier?
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
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education