Company purchases the 50,000 starters that it installs in its standard line of farm tractors per unit. Due to a reduction in output, the company now has idle capacity that could be used to p buying them from an outside supplier. However, the company's chief engineer is opposed to mak production cost per unit is $11.90 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Per Unit Total $ 5.00 3.20 1.80 $ 90,000 1.00 0.50 0.40 $ 20,000 $ 50,000 Total production cost $11.90

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Futura Company purchases the 50,000 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 $11.90 as shown below:
Per Unit
$ 5.00
3.20
Total
Direct materials
Direct labor
Supervision
Depreciation
Variable manufacturing overhead
Rent
1.80
1.00
0.50
0.40
$ 90,000
$ 50,000
$ 20,000
Total production cost
$11.90
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $90,000) 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 $90,000 per period. Depreciation is due to obsolescence rather
than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the 50,000 starters instead of buying them from an outside supplier?
Transcribed Image Text:Futura Company purchases the 50,000 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 $11.90 as shown below: Per Unit $ 5.00 3.20 Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 1.80 1.00 0.50 0.40 $ 90,000 $ 50,000 $ 20,000 Total production cost $11.90 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $90,000) 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 $90,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 50,000 starters instead of buying them from an outside supplier?
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