Vishnu Futura Company purchases the 79,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.20per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather thanbuying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because theproduction cost per unit is $13.80 as shown below:Direct materialsDirect laborSupervisionDepreciationVariable manufacturing overheadRentTotal product costPer UnitTotal$ 7.003.201.50$ 118,5001.10$ 86,9000.500.50$ 13.80$ 39,500If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $118,500) 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 aboveis based on space utilized in the plant. The total rent on the plant is $90,000 per period. Depreciation is due to obsolescence ratherthan wear and tear.Required:What is the financial advantage (disadvantage) of making the 79,000 starters instead of buying them from an outside supplier?

1. Calculate the Cost of Making Internally:Direct material cost: 79,000 units×$7/unit=$553,000Direct…

Answered: Futura Company purchases the 79,000…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 3CMA: Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each...

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Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of 150,000 and a theoretical capacity to produce 60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the facilities would be idle, and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are 11 per unit. Fixed overhead is allocated based on planned production levels. If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the suppliers unit price is less than: a. 12.00. b. 12.50. c. 13.00. d. 14.00.
Oat Treats manufactures various types of cereal bars featuring oats. Simmons Cereal Company has approached Oat Treats with a proposal to sell the company its top selling oat cereal bar at a price of $27,500 for 20,000 bars. The costs shown are associated with production of 20,000 oat bars currently. The manufacturing overhead consists of $3,000 of variable costs with the balance being allocated to fixed costs. Should Oat Treats make or buy the oat bars?
Jonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows: The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of 945,000 with terms of 2/10, n/30; the companys policy is to take all purchase discounts. The freight on the equipment would be 11,000, and installation costs would total 22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of 12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of 2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of 1,500. Rather than replace the equipment, one of Jonfrans production managers has suggested that the waste containers be purchased. One supplier has quoted a price of 27 per container. This price is 8 less than Jonfrans current manufacturing cost, which is as follows: Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at 45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment. Jonfran is subject to a 40 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate. Required: 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative. 3. Which should Jonfran domake or buy the containers? What qualitative factors should be considered? (CMA adapted)
Boston Executive. Inc., produces executive limousines and currently manufactures the mini-bar inset at these costs: The company received an offer from Elite Mini-Bars to produce the insets for $2,100 per Unit and supply 1,000 mini-bars for the coming years estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the companys total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the mini bar production can be used by a different production group that will lease it for $55,000 per year. Should the company make or buy the mini-bar insert?
Futura Company purchases the 66,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.10 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 $13.10 as shown below: Direct materials. Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 7.00 2.20 1.80 1.20 0.40 0.50 $ 13.10 Total $ 118,800 $ 79,200 $ 33,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $118,800) 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 $81,000…
Vijay
Futura Company purchases the 74,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.60 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 $13.10 as shown below: Direct materials. Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 6.00 3.00 1.60 1.50 0.60 0.40 $ 13.10 Total $ 118,400 $ 111,000 $ 29,600 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $118,400) 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 $81,000 per period.…
Meman
Sagar
Futura Company purchases the 65,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.30 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 $12.90 as shown below: Per Unit Total Direct materials $ 5.00 Direct labor 3.50 Supervision Depreciation Variable manufacturing overhead 1.80 $117,000 1.50 $ 97,500 0.80 Rent 0.30 $ 19,500 Total product cost $12.90 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $117,000) 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 $85,000 per period.…
Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.70 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 $12.90 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 6.00 3.00 1.50 1.30 0.70 0.40 $ 12.90 Total If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $106,500) 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…
Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.70 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 $12.90 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 6.00 3.00 1.50 1.30 0.70 0.40 $12.90 Total $ 106,500 $ 92,300 $ 28,400 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $106,500) 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.…

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