Saved Help Save Exit Submit 4w Check my work purchases the

Saved Help Save & Exit Submit 4w Check my work purchases the 77000 starters that It Installs In lts standard line of farm tractors from a supplier for the price of $11.00 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 $11.90 as shown below Per Unit Total $ 6.00 birect naterials Direct labor Supervision Depreciation Variable sanutacturing overhead Rent Total product cost 2.20 1.50 $115,50 1.40 $107,800 0.30 .50 ? 38,500 $11.90 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,500) 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 $88,000 per perlod. s Depreciation is due to obsolescence rather than wear and tear. Required What is the financial advantage (disadvantage) of making the 77000 starters instead of buying them from an outside supplier?

Solution

Net Finanncial advantage/ Disadvantage BUY MAKE Net Effect On Income Cost of Buying 847000 0 847000 Cost of manufacture: Material (77000*6) 0 462,000 -462,000 Labour (77000*2.20) 0 169,400 -169,400 Surpervision 0 115500 -115500 Variable Manufacturing OH 0 23100 -23100 Net Increase in income 847000 770000 77000 Net financial advantage of making 77000 starters is $ 77000