For mary years Futura Company has purchased the starters tha

For mary years Futura Company has purchased the starters that it installs in its slandard line of farrm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the slarters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $10.90 per unit purchase pnce Direct materials Direct labor S 5.00 Depreciation Vaniable manufacturing overhead Rent 2.80 1.60 $104 000 1.30 S 84,500 0.70 040 26,000 Tolal product cost S 11.80 A supervisor would have to be hired to oversee production of the starters. However, the company has sutficient idle tools and machinery so that no new equipment would have to be purchased. The rent charge above is based an space utilized in the plant. The total rent on the plant is $89,000 per perlod Depreclation is due to obsclescence rather than wear and tear Required 1. Determine the total relevant cost per unit It starters are made inslde the company. Round your answer to 2 decimal places.) cost 2 Determine the total relevant cost per unit if starters are purchased from an outside supplier (Round your answer to 2 decimal places.) cosl 3. What is the increase or decrease in prots as a result of purchasing the starters from an outside supplier rather than making them inside the company? (Do not round intermediate calculations, Round your answer to the nearest dollar amount.)

Solution

1) Relevant cost per unit: Direct material $               5.00 Direct labor (as given) $               2.80 Variable manufacturing overhead $               0.70 Supervision $               1.60 Relevant cost per unit $             10.10 2) Total relevant cost if purchased $             10.90 3) Profit would decrease by $52,000 [Units purchased*10.90-10.10 = 65000*0.80 = $           52,000