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 overheadRent1.801.000.500.40$ 90,000$ 50,000$ 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?

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Company purchases the 50,000 starters that it installs in its standard line of farm tractors per unit. Due to a reduction in output, the company now has idle capacity that could be used to p buying them from an outside supplier. However, the company's chief engineer is opposed to mak production cost per unit is $11.90 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Per Unit Total $ 5.00 3.20 1.80 $ 90,000 1.00 0.50 0.40 $ 20,000 $ 50,000 Total production cost $11.90

Company purchases the 50,000 starters that it installs in its standard line of farm tractors per unit. Due to a reduction in output, the company now has idle capacity that could be used to p buying them from an outside supplier. However, the company's chief engineer is opposed to mak production cost per unit is $11.90 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Per Unit Total $ 5.00 3.20 1.80 $ 90,000 1.00 0.50 0.40 $ 20,000 $ 50,000 Total production cost $11.90

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter10: Short-term Decision Making

Section: Chapter Questions

Problem 4EB: Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all...

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