In: Accounting
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 | 3.50 | |||
Supervision | 1.80 | $ | 99,000 | |
Depreciation | 1.30 | $ | 71,500 | |
Variable manufacturing overhead | 0.60 | |||
Rent | 0.40 | $ | 22,000 | |
Total product cost | $ | 14.60 | ||
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 $88,000 per period. Depreciation is due to obsolescence rather than wear and tear. |
Required: |
1. |
Determine the total relevant cost per unit if starters are made inside the company. (Round your answer to 2 decimal places.) |
2. |
Determine the total relevant cost per unit if starters are purchased from an outside supplier. (Round your answer to 2 decimal places.) |
3. |
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.) |
All amounts are in $
Ans1. Total Relevant cost if starters are made inside the company would be as under
Units required are 55,000 starters
Particulars | Per unit cost |
Direct Material | 7.00 |
Direct Labours | 3.50 |
Supervision | 1.80 |
Depreciation | 0 |
Variable manufacturing overhead | 0.60 |
Rent | 0 |
Total relevant cost per unit | 12.90 |
As company has idle capacity lying, so depreciation and rent cost will not be increased for extra production of 55,000 units, so we both of these costs are irrelevant in nature.
Ans2. Total relevant cost if starters are purchased from putside suppliers will be purchasing cost only which is
Purchase price = $13.70
Ans3. So according to above figures we can say that cost of purchasing from outside suppliers is higher than internal manufacturing because
Outside purchase cost = 13.70
Internal Manufacturing cost = 12.90
Loss perunit if outside purchase = 0.80
So decrease in profits due to outside purchase rather than inside manufacture = 0.80*55000 = $44,000