Futura Company purchases 67,000 starters from a supplier at $12.20 per unit that it installs...
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Accounting
Futura Company purchases 67,000 starters from a supplier at $12.20 per unit that it installs in farm tractors. Due to a reduction in output, the company now has enough idle capacity to produce the starters rather than buying them from the supplier. However, the companys chief engineer is opposed to making the starters because the production cost per unit is $13.20, as shown below:
Per Unit
Total
Direct materials
$ 7.00
Direct labor
2.20
Supervision
1.70
Depreciation
1.40
Variable manufacturing overhead
0.50
Rent
0.40
Total product cost
$ 13.20
If Futura decides to make the starters, a supervisor would be hired (at a salary of $113,900) 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 $87,000 per period.
Required:
What is the financial advantage (disadvantage) of making the 67,000 starters instead of buying them from an outside supplier?
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