Make or Buy Decision Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $840 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 $9.20 as shown below: If Futura decides to make the starters, a supervisor would has to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than near and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier?
Make or Buy Decision Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $840 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 $9.20 as shown below: If Futura decides to make the starters, a supervisor would has to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than near and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier?
Solution Summary: The author explains the factors to be taken care while deciding whether a particular component should be produced in-house or buy from outside suppliers.
Make or Buy Decision Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $840 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 $9.20 as shown below:
If Futura decides to make the starters, a supervisor would has to be hired (at a salary of $60,000) 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 $80,000 per period. Depreciation is due to obsolescence rather than near and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying them from an outside supplier?
Definition Video Definition Accounting method wherein the cost of a tangible asset is spread over the asset's useful life. Depreciation usually denotes how much of the asset's value has been used up and is usually considered an operating expense. Depreciation occurs through normal wear and tear, obsolescence, accidents, etc. Video
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