Futura Company purchases the 60,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.80 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 $11.30 as shown below: Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total production cost Per Unit $ 5.00 2.00 1.90 1.00 0.80 0.60 $11.30 $114,000 $ 60,000 $ 36,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $114,000) 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 60,000 starters instead of buying them from an outside supplier? Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $76,000 per ton, one-fourth of which is allocated to product X15. Six thousand two hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $14 each, or processed further at a total cost of $6,600 and then sold for $20 each Required: 1. What is the financial advantage (disadvantage) of further processing product X15? 2. Should product X15 be processed further or sold at the split-off point? 2. Product X15 should be Thalassines kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows: Thalassines kataskeves, S.A. Income Statement-Bilge Pump For the Quarter Ended March 31 $ 410,000 $ 133,000 46,000 18,000 197,000 213.000 Variable expenses: Variable manufacturing expenses Sales commissions Shipping Total variable expenses Contribution margin Tixed expenses Advertising (for the bilge pamp product line) Depreciation of equipment (no resale value) General factory overhead Salary of product line manager Insurance on inventories Purchasing department Total fixed expenses Net operating loss 29,000 108,000 34,000 126,000 8.000 54.000+ 359.000 $(146.000) "Common costs allocated on the basis of machine hours. Common costs allocated on the basis of sales dollars. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses. Required: What is the financial advantage (disadvantage) of discontinuing the bilge pump product line
