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 per unit cost to produce the 55,000 starters needed would be greater than the current $10.10 per unit purchase price:
|
Per Unit
|
Total
|
|
Direct materials
|
5.00
|
|
|
Direct labor
|
2.50
|
|
|
Supervision
|
1.60
|
88,000
|
|
Depreciation
|
1.20
|
66,000
|
|
Variable manufacturing overhead
|
0.40
|
|
|
Rent
|
0.40
|
22,000
|
|
Total product cost
|
11.10
|
|
A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery so 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 $82,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Required:
1. Determine the total relevant cost per unit if starters are made inside the company.
2. Determine the total relevant cost per unit if starters are purchased from an outside supplier.
3. What is the increase or decrease in profits as a result of purchasing the starters from an outside supplier rather than making them inside the company?