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 60,000 starters needed would be greater than the current $13.20 per unit purchase price.

Per Unit Total

Direct materials $ 7.00

Direct labor $ 3.20

Supervision $ 1.90 $114,000

Depreciation $ 1.40 $84,000

Variable manufacturing overhead 0.40

Rent $ 0.50 $ 30,000

Total product cost $14.40

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.

A. Determine the total relevant cost per unit if starters are made inside the company.

B. 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?

Profit would

decrease

by

per period

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 60,000 starters needed would be greater than the current $13.20 per unit purchase price: Per Unit $ Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total 7.00 3.20 1.90 $114,000 1.40 $ 84,000 0.40 0.50 $ 30,000 Total product cost $ 14.40 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. A. Determine the total relevant cost per unit if starters are made inside the company. B. 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? Profit would decrease by per period