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 of some of its products, 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 cost to produce the starters would be greater than the current $12.60 per unit purchase price:

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Per UnitTotalDirect materials$4.65Direct labour4.05Supervision2.25$90,000Depreciation1.5060,000Variable manufacturing overhead0.90Rent0.4518,000Total production cost$13.80

A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery 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 $148,000 per period. Depreciation is due to obsolescence, rather than wear and tear.

need:

need computations to show the dollar advantage or disadvantage per period of making the starters.

BRIEF EXERCISE 9-5

Determining Whether to Accept a Special Order[LO1-CC5]

Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per year is as follows:

Direct materials$6.10Direct labour3.80Variable manufacturing overhead2.00Fixed manufacturing overhead4.20Variable selling and administrative expense2.50Fixed selling and administrative expense2.40

The normal selling price is $25 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $16 per unit. This order would not affect regular sales.

need:

1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company's total fixed costs.)

2.Assume the company has 1,000 units of this product left over from last year that are vastly inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost figure is relevant for establishing a minimum selling price for these units? Explain answer.