Exercise 12-10 Make or Buy Decision (L012-3] Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.50 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 $12.90 as shown below: Per Total Unit $ 6.00 2.20 2.00 $142,000 1.30 $ 92,300 Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost @.80 0.60 $ 42,600 $12.90 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $142.000) 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 $89,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 71,000 starters instead of buying them from an outside supplier? Exercise 12-17 Dropping or Retaining a Segment [LO12-2] Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: Department Total Hardware Linens Sales $4,160,000 $3,040,000 $1,120,000 Variable expenses 1,209,000803, 000406,000 Contribution 2,951,000 2,237,000 714,000 margin Fixed expenses 2,160,000 1,320,000 840,000 Net operating $ 791,000 $ 917, eee $ (126,000) income (loss) A study indicates that $375,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 20% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department