ss Exercise 13-10 (Algo) Make or Buy Decision [LO13-3]Futura Company purchases the 73,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.90per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than ibuying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because theproduction cost per unit is $11.70 as shown below:Direct materialsDirect laborSupervisionDepreciationVariable manufacturing overheadRentTotal product costPer Unit Total$5.003.001.001.200.400.30$11.70$ 131,400$ 87,600$ 21,900If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $131,400) 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 aboveis based on space utilized in the plant. The total rent on the plant is $83,000 per period. Depreciation is due to obsolescence ratherthan wear and tear.Required:What is the financial advantage (disadvantage) of making the 73,000 starters instead of buying them from an outside supplier?

Sometimes manufacturing entities get offers to buy the same product (they are manufacturing) from…

Answered: Required: What is the financial…

Required: What is the financial advantage (disadvantage) of making the 73,000 starters instead of buying them from an outside supplier?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 5P

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Pricing

Pricing is used as a term in finance and economics, pricing is the process of fixing a value for a product or a service. Pricing establishes a value for a product or service that the customer has to pay. A business can choose from different strategies while deciding to set prices.

Question

Exercise 13-10 (Algo) Make or Buy Decision [LO13-3]
Futura Company purchases the 73,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.90
per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than i
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 $11.70 as shown below:
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing overhead
Rent
Total product cost
Per Unit Total
$5.00
3.00
1.00
1.20
0.40
0.30
$11.70
$ 131,400
$ 87,600
$ 21,900
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $131,400) 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 $83,000 per period. Depreciation is due to obsolescence rather
than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 73,000 starters instead of buying them from an outside supplier?

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