Question

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 if starters are made inside the company. (Round your answer to 2 decimal places.) PART2. Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.) PART3. What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Profit would ________ by ___________ per period     Per Unit Total   Direct materials $ 6.00   Direct labor 2.50   Supervision 1.60 $ 88,000   Depreciation 1.10 $ 60,500   Variable manufacturing overhead 0.80      Rent 0.50 $ 27,500   Total product cost $ 12.50 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery so 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.

Answer 1

Part 1
total relevant cost per unit if starters are made inside the company
	Amount in $	Amount in $
Relevant cost	Per Unit	Total (55000)
Direct materials	6	330000
Direct labour	2.5	137500
SuperVision	1.6	88000
Depreciation	-	-
variable manufacturing over head	0.8	44000
Rent	-	-
Relavent Cost	10.9	599500
Part 2
total relevant cost per unit if starters are purchased from an outside supplier
Per unit Relavent Cost	$11.60
Total relavent Cost for 55000 Units (55000*$11.60)	$638000
Part 3
Effect on Incom4e if they are purchased from Outsider rather then own making
Total Purchasing cost from Outsiders	$638000
Less: Total Relavent manufacturing Cost	$599500
Excess Cost incurred	$38500
if the starters pourchased from outside the excess cost incurred is $38500, then the Income will reduced by $38500
Profit Would Decresed By $38500 Per period