Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.40per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather thanbuying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because theproduction cost per unit is $11.50 as shown below:Direct materialsDirect laborSupervisionDepreciationVariable manufacturing overheadRentTotal product costPer Unit$ 5.002.201.901.200.700.50$ 11.50Total$ 134,900$ 85,200$ 35,500If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $134,900) 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 aboveis based on space utilized in the plant. The total rent on the plant is $83,000 per period. Depreciation is due to obsolescence ratherthan wear and tear.Required:What is the financial advantage (disadvantage) of making the 71,000 starters instead of buying them from an outside supplier?

Buy cost is the cost to purchase the product from outside. Make cost is the cost of making/…

Answered: Futura Company purchases the 71,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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