Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.20 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 $12.40 as shown below: Direct materials Direct labor Supervision Depreciation Per Unit $ 6.00 Total 2.80 1.40 $ 96,600 1.30 $ 89,700
Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.20 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 $12.40 as shown below: Direct materials Direct labor Supervision Depreciation Per Unit $ 6.00 Total 2.80 1.40 $ 96,600 1.30 $ 89,700
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the
price of $12.20 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 $12.40 as shown below:
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing overhead
Rent
Total product cost
Per Unit
$ 6.00
Total
2.80
1.40
$ 96,600
1.30
$ 89,700
0.40
0.50
$ 34,500
$ 12.40
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $96,600) 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 $90,000 per
period. Depreciation is due to obsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 69,000 starters instead of buying them from an outside
supplier?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5eca527d-9a6f-4e4d-9b79-579da2fb75c6%2F0d37455b-d75f-48e0-9793-158141cf29ad%2Fj7859ah_processed.png&w=3840&q=75)
Transcribed Image Text:Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the
price of $12.20 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 $12.40 as shown below:
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing overhead
Rent
Total product cost
Per Unit
$ 6.00
Total
2.80
1.40
$ 96,600
1.30
$ 89,700
0.40
0.50
$ 34,500
$ 12.40
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $96,600) 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 $90,000 per
period. Depreciation is due to obsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 69,000 starters instead of buying them from an outside
supplier?
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