Check my 8 Futura Company purchases the 97,500 starters that it installs in its
ID: 2564732 • Letter: C
Question
Check my 8 Futura Company purchases the 97,500 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.80 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 $11.90 as shown below: 4 points Per Unit Total 5.00 2.80 1.70 $110,500 1.50 97,500 0.50 Skipped Direct materials Direct labor Supervisiorn Depreciation Variable manufacturing overhead Rent eBook Print References 0.40 26,000 $11.90 Total product cost If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $110,500) 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 $80,000 per period. Depreciation is due to obsolescence rather than wear and tear Required What is the financial advantage (disadvantage) of making the 97,500 starters instead of buying them from an outside supplier?Explanation / Answer
Cost of manufacturing 97500 starters: Direct material (@5.00 per unit) 487500 Direct labour(@2.80 per unit) 273000 Variable manufacturing overheads(@0.50 per unit) 48750 Supervisors salary 110500 Total cost of manufacturing 919,750 Cost of Buying from Supplier (97500 units@10.80) 1,053,000 Financial advantage of manufacturing 133,250 Therefore, the company must manufacture the starters. Note: Rent and depreciation are the expense, which have to be borne by the company while buying the starters from suppliers. Hence, it is irrelevant cost.