EXERCISE 12-10 Make or Buy a Component [LO12-3] For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $8.40 per unit purchase price: Per Unit Total Direct materials ................ Direct labor ........... ...... Supervision .......... Depreciation ......... Variable manufacturing overhead ... Rent ......... Total production cost ........... $3.10 2.70 1.50 1.00 0.60 0.30 $9.20 $60,000 $40,000 $12,000 A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery 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 $80.000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: Prepare computations showing how much profits will increase or decrease as a result of making the starters.
Related questions
Futura Company purchases the 70,000 starters that it installs inits standard line of farm tractors from a supplier for the price of$12.60 per unit. Due to a reduction in output, the company now hasidle capacity that could be used to produce the starters ratherthan buying them from an outside supplier. However, the companyâschief engineer is opposed to making the starters because theproduction cost per unit is $12.90 as shown below:
| Per Unit | Total | |||||
| Direct materials | $ | 6.00 | ||||
| Direct labor | 3.00 | |||||
| Supervision | 1.90 | $ | 133,000 | |||
| Depreciation | 1.10 | $ | 77,000 | |||
| Variable manufacturingoverhead | 0.60 | |||||
| Rent | 0.30 | $ | 21,000 | |||
| Total product cost | $ | 12.90 | ||||
If Futura decides to make the starters, a supervisor would haveto be hired (at a salary of $133,000) to oversee production.However, the company has sufficient idle tools and machinery suchthat no new equipment would have to be purchased. The rent chargeabove is based on space utilized in the plant. The total rent onthe plant is $88,000 per period. Depreciation is due toobsolescence rather than wear and tear.
Required:
What is the financial advantage (disadvantage) of making the70,000 starters instead of buying them from an outsidesupplier?
