Question

In: Accounting

Futura Company purchases the 78,000 starters that it installs in its standard line of farm tractors...

Futura Company purchases the 78,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.30 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 $12.80 as shown below:

Per Unit Total Direct materials $ 6.00 Direct labor 3.00 Supervision 1.70 $ 132,600 Depreciation 1.30 $ 101,400 Variable manufacturing overhead 0.30 Rent 0.50 $ 39,000 Total product cost $ 12.80 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $132,600) 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 $83,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required:

What is the financial advantage (disadvantage) of making the 78,000 starters instead of buying them from an outside supplier?

Solutions

Expert Solution

Answer 1)

Calculation of Financial advantage (disadvantage) of making 78,000 starters instead of buying them

Make

Amount (In $)

Buy

Amount (In $)

Direct Materials (78,000 units X $ 6 per unit)

             468,000

Purchase cost (78,000 units X $ 12.30 per unit)

             959,400

Direct Labor (78,000 units X $ 3 per unit)

             234,000

Variable manufacturing overhead (78,000 units X $ 0.30 per unit)

               23,400

Additional supervisor's salary

             132,600

Total relevant cost to Make

             858,000

Total relevant cost to Buy

             959,400

Since the relevant cost to Make (i.e. $ 858,000) is less than relevant cost to Buy (i.e. $ 959,400), if the company decides to make the starters in- house, it will have financial advantage of $ 101,400 (i.e. $ 959,400 - $ 858,000).

Notes:

· Allocated fixed overhead cost (i.e. Supervision, Depreciation of machine and Rent) is not a relevant cost to make starters as there is no additional expense (since the company has idle capacity) and change in allocation does not result in change in cash outflows. Thus these fixed costs should be charged to existing production.

· Additional supervisor’s salary is in addition to exiting supervision cost and since this will be incurred only if the company decides to make starters in-house, it is a relevant cost to make.


Related Solutions

Futura Company purchases the 78,000 starters that it installs in its standard line of farm tractors...
Futura Company purchases the 78,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.90 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 $12.40 as shown below: Per Unit Total Direct...
Futura Company purchases the 79,000 starters that it installs in its standard line of farm tractors...
Futura Company purchases the 79,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.90 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 $11.50 as shown below: Per Unit Total Direct...
Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors...
Futura Company purchases the 70,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.20 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 $11.70 as shown below: Per Unit Total Direct...
Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors...
Futura Company purchases the 69,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.70 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 $12.00 as shown below: Per Unit Total Direct...
Hamilton Company purchases the 63,000 starters that it installs in its standard line of farm tractors...
Hamilton Company purchases the 63,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.60 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 $12.70 as shown below: Per Unit Total Direct...
For many years Futura Company has purchased the starters that it installs in its standard line...
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 55,000 starters needed would be greater than the current $11.60 per unit purchase price: Required: PART1. Determine the total relevant cost per unit...
For many years Futura Company has purchased the starters that it installs in its standard line...
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the per unit cost to produce the 55,000 starters needed would be greater than the current $13.70 per unit purchase price:     Per Unit Total   Direct materials $ 7.00   Direct labor...
you are the marketing manager for a start-up company the manufacturers farm tractors. you are planning...
you are the marketing manager for a start-up company the manufacturers farm tractors. you are planning to wnter the markets in the US, Japan, and India. What promotion strategy would you use for each market and what will your supply chain look like? The product will be manufactured in Mexico woth some components made in the US and China. how would you get the products to the customers?
The Silva Refrigeration Co. purchases and installs defrost clocks in its products. The clocks cost $180...
The Silva Refrigeration Co. purchases and installs defrost clocks in its products. The clocks cost $180 per case, and each case contains 12 clocks. The supplier recently gave advance notice that, effective in 60 days; the price will rise by 50 percent. The company has idle equipment that, with only a few minor changes could be used to produce similar defrost clocks. Cost estimates have been prepared under the assumption that the company could make the product itself. Direct materials...
The Zurich Chocolate Company uses standard cost in the manufacture of its line of fine chocolates....
The Zurich Chocolate Company uses standard cost in the manufacture of its line of fine chocolates. Operating data for the past week is summarize as follows:    Standard Cost Card – per box:        Direct materials, .5 kg at $16 per kg.       $ 8.00        Direct labor, 1.5 hours at $15/hour       22.50        Variable overhead, 1.5 hours at $10/hour   15.00        Standard cost per unit               $45.50 The company produced 4,000 boxes...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT