Question 1

Question 2

Futura Company purchases the 61,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.70 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 $1270 as shown below: Per Unit Total Direct materials $ 6.00 Direct labor 2.80 Supervision 1.90 $ 115,900 Depreciation 1.10 $ 67,100 Variable manufacturing overhead 0.40 Rent 0.50 $ 30,500 Total product cont $ 12.70 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,900) 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 $86,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 61,000 starters instead of buying them from an outside supplier? Protits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (light 482) is as follows: Tieket revenue (180 seats 404 occupancy - $200 ticket price) 14.400 100.00 Variable expenses ($18.00 per person) 1.296 Contribution margin 13,104 914 Fight expenses salarios, flight crew $ 1.900 Flight promotion Depreciation of aircraft 1.600 Fuel tor Aircraft 5,000 Liability insurance 4,800 Solaries, flight anstanta 1.400 Daggage loading and flight preparation 1,850 Overnight costs for flight crew and assistante at destination 600 Total flight expenses 17.920 Net operating loss $ (4,816) 770 The following additional information is available about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, Ann The following additional information is available about fight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete. b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company. the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decision to drop flight 482. c. The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses. d. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight e. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. 1. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482