Check my work Futura Company purchases the 73,000 starters that it installs in i
ID: 2536461 • Letter: C
Question
Check my work Futura Company purchases the 73,000 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: 10 points Per Unit Total $ 6.00 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 3.00 1.90 $138,700 1.50 $109,500 0.60 0.60 43,800 eBook Print References Total product cost $13.10 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $138,700) 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 $82,000 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?Explanation / Answer
Solution:
The target production level is 73,000 starters, as shown by the relations between per-unit and total fixed costs.
Cost “per unit”
Differential cost
Make
Buy
Direct materials
$ 6.00
$ 6.00
Direct labor
3.00
3.00
Variable manufacturing overhead
0.60
0.60
Supervision
1.90
1.90
Depreciation
1.50
Rent
0.60
Outside purchase price
$12.10
Total cost
$ 13.60
$ 11.50
$12.10
Cost saved
$ 0.60
The company should make the starters, rather than continuing to purchase from the outside supplier.
Making the starters will result in a $0.60 ($12.10- $ 11.50) per starter cost savings, or a Total savings of $ 43,800 per period.
: $0.60 per starter × 73,000 starters = $43,800
Conclusion:
The financial advantage of making the 73,000 starters instead of buying them from an outside supplier is:
-Per starter cost saving of $ 0.60
-Total saving of $ 43,800
Note: In question $ 13.10, production cost per unit is wrong, it should be $ 13.60.
($ 6 + 3 + 1.90 + 1.50 + 0.60 +0.60)= $ 13.60.
Cost “per unit”
Differential cost
Make
Buy
Direct materials
$ 6.00
$ 6.00
Direct labor
3.00
3.00
Variable manufacturing overhead
0.60
0.60
Supervision
1.90
1.90
Depreciation
1.50
Rent
0.60
Outside purchase price
$12.10
Total cost
$ 13.60
$ 11.50
$12.10
Cost saved
$ 0.60