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Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.20 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 $14.20 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 7.00 3.00 1.50 1.40 0.70 0.60 $14.20 Total $ 105,000 $ 98,000 $ 42,000

Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.20 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 $14.20 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 7.00 3.00 1.50 1.40 0.70 0.60 $14.20 Total $ 105,000 $ 98,000 $ 42,000

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.20 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 $14.20 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 7.00 3.00 1.50 1.40 0.70 0.60 $ 14.20 Total $ 105,000 $ 98,000 $ 42,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $105,000) 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 and can't be avoided. The total rent on the plant is $88,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What would be the total financial impact of making the 70,000 starters instead of buying them from an outside supplier? (Indicate negative cash flows with a negative sign.) (Hint: In all of the make-or-buy questions, be sure to account for what they would have to pay the supplier to make the products for them.)
Transcribed Image Text:Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.20 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 $14.20 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 7.00 3.00 1.50 1.40 0.70 0.60 $ 14.20 Total $ 105,000 $ 98,000 $ 42,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $105,000) 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 and can't be avoided. The total rent on the plant is $88,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What would be the total financial impact of making the 70,000 starters instead of buying them from an outside supplier? (Indicate negative cash flows with a negative sign.) (Hint: In all of the make-or-buy questions, be sure to account for what they would have to pay the supplier to make the products for them.)
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