Check my work Futura Company purchases the 66,000 starters that it installs in i
ID: 2580686 • Letter: C
Question
Check my work Futura Company purchases the 66,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.30 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 $11.00 as shown below: 12.5 points 3 01:35:55 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit Total $ 5.00 2.20 1.70 $ 93,500 1.20 $ 66,000 0.60 0.30 $ 16,500 $11.00 eBook Print References If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $93,500) 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 $87,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 66,000 starters instead of buying them from an outside supplier? Financial advantage $ 71,500Explanation / Answer
Supervision cost is relevant cost.
Rent expense is irrelevant since that is already being incurred.
Depreciation is also unavoidable and irrelevant cost.
The total relevant cost
The purchase cost = $10.30 x 66000 = $679800
Financial advantage = $679800 - $608300 = $71500
Direct materials $330000 Direct labor 145200 Variable manufacturing overhead 39600 Supervision 93500 Total cost $608300