Problem - 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 $3.10
Direct labor 2.70
Supervision 1.50 $60,000
Depreciation 1.00 $40,000
Variable manufacturing overhead 0.60
Rent 0.30 $12,000
Total production cost $9.20
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.