Walton Co. purchases the 400,000 compressors that it installs in its refrigerators from a Chinese company for the price of $26 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 mechanical engineer is opposed to making the compressors because the production cost per unit is $28 as shown below: Per unit Total Direct material 9.00 Direct labor 7.00 Supervisor's salary 4.50 $18,00,000 Depreciation on machinery 2.50 Rent 1.00 400,000 Variable manufacturing overhead 4.00 $16,00,000 Total production cost 28.00 If Walton Co. decides to make the compressors, a supervisor would have to be hired (at a salary of $18, 00,000) to oversee production. However, the company does not need to purchase any new equipment. The rent charge above is based on space utilized in the plant. The total rent on the factory is $24,00,000 per period. Required: What is the financial advantage (disadvantage) of making the 400,000 compressors instead of buying them from an outside supplier?
Walton Co. purchases the 400,000 compressors that it installs in its refrigerators from a Chinese company for the price of $26 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 mechanical engineer is opposed to making the compressors because the production cost per unit is $28 as shown below: Per unit Total Direct material 9.00 Direct labor 7.00 Supervisor's salary 4.50 $18,00,000 Depreciation on machinery 2.50 Rent 1.00 400,000 Variable manufacturing overhead 4.00 $16,00,000 Total production cost 28.00 If Walton Co. decides to make the compressors, a supervisor would have to be hired (at a salary of $18, 00,000) to oversee production. However, the company does not need to purchase any new equipment. The rent charge above is based on space utilized in the plant. The total rent on the factory is $24,00,000 per period. Required: What is the financial advantage (disadvantage) of making the 400,000 compressors instead of buying them from an outside supplier?
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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Transcribed Image Text:Walton Co. purchases the 400,000 compressors that it installs in its refrigerators from a Chinese company for the
price of $26 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 mechanical engineer is
opposed to making the compressors because the production cost per unit is $28 as shown below:
Per unit
Total
Direct material
9.00
Direct labor
7.00
Supervisor's salary
4.50
$18,00,000
Depreciation on machinery
2.50
Rent
1.00
400,000
Variable manufacturing overhead
4.00
$16,00,000
Total production cost
28.00
If Walton Co. decides to make the compressors, a supervisor would have to be hired (at a salary of $18, 00,000) to
oversee production. However, the company does not need to purchase any new equipment. The rent charge above
is based on space utilized in the plant. The total rent on the factory is $24,00,000 per period.
Required: What is the financial advantage (disadvantage) of making the 400,000 compressors instead of buying
them from an outside supplier?
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