Futura Company purchases the 79000 starters thet it installs

Futura Company purchases the 79,000 starters thet it installs in its standard line of farm tractors from a supplier for the price of $10 per unit. Due t o 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 $11.80 as shown below Per Unit Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent 5.00 2.80 1.70 $134, 300 1.10 $ 86, 900 0.80 0.40 31,600 $11.80 Total product cost s to make the starters, a supervisor would have to be hired (at a salary of $134,300) to oversee production. However y has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge is based on space utilized in the plant. The total rent on the plant is $90,000 per period. Deprefiation is due to obsolescence ra than wear and tear. Required What is the financial advantage (disadvantage) of making the 79,000 starters instead of buying them from an outside supplier?

Solution

Cost of manufacturing a starter

Rent and depreciation are fixed costs and hence these would not be considered while calculating cost of manufacturing the starters since these will have to be incured whether the starters are manufactured or bought from the outside supplier.

Cost of manufacturing 1 starter = $10.30

Outside supplier\'s price = $11.10

Hence, economy in manufacturing 1 starter = 11.10 - 10.30

= $0.80

Hence financial advantage of manufacturing 79,000 starters = 79,000 x 0.80

= $63,200

Direct material	$5
Direct labor	$2.80
Supervision	$1.70
Variable manufacturing overhead	$0.80
Cost of manufacturing 1 starter	$10.30