Exercise 11-10 Make or Buy Decision [L011-3]Futura Company purchases the 50,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.70per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather thanbuying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because theproduction cost per unit is $11.90 as shown below:Per Unit$ 5.003.20TotalDirect materialsDirect laborSupervisionDepreciationVariable manufacturing overhead1.80 $ 90,0001.000.50$ 50,000Rent0.40$ 20,000Total production cost$11.90If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $90,000) 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 aboveis based on space utilized in the plant. The total rent on the plant is $90,000 per period. Depreciation is due to obsolescence ratherthan wear and tear.Required:What is the financial advantage (disadvantage) of making the 50,000 starters instead of buying them from an outside supplier?Financial advantage

Financial advantage (disadvantage) of making the starters = (Purchase price per unit - Relevant…

Futura Company purchases the 50,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.70 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 $ 5.00 3.20 1.80 1.00 0.50 0.40 Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead $ 90,000 $ 50,000 Rent $ 20,000 Total production cost $11.90 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $90,000) 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 $90,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 50,000 starters instead of buying them from an outside supplier? Financial advantage

Futura Company purchases the 50,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.70 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 $ 5.00 3.20 1.80 1.00 0.50 0.40 Total Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead $ 90,000 $ 50,000 Rent $ 20,000 Total production cost $11.90 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $90,000) 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 $90,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 50,000 starters instead of buying them from an outside supplier? Financial advantage

Financial & Managerial Accounting

13th Edition

ISBN:9781285866307

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter27: Lean Principles, Lean Accounting, And Activity Analysis

Section: Chapter Questions

Problem 27.1BPR

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