Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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,

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 40,000 starters needed would be greater than the current $8.40 per unit purchase price:

Per Unit Total
Direct materials $ 3.10
Direct labor 2.70
Supervision 1.50 $ 60,000
Depreciation 1.00 $ 40,000
Variable manufacturing overhead 0.60
Rent 0.30 $ 12,000
Total product cost $ 9.20

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 $80,000 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. (Round your answer to 2 decimal places.)

3.

What is the increase or decrease in profits as a results of purchasing the parts from the starters rather than making them inside the company? (Do not round intermediate calculations.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Portfolio Of Marketing Audits Company Self Assessment Audits

Authors: David Crosby

1st Edition

1902433157, 978-1902433158

More Books

Students also viewed these Accounting questions