Question

Futura Company purchases the 73,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $13.40 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 $13.80 as shown below:

	Per Unit			Total
Direct materials	$	7.00
Direct labor		2.80
Supervision		1.70		$	124,100
Depreciation		1.20		$	87,600
Variable manufacturing overhead		0.60
Rent		0.50		$	36,500
Total product cost	$	13.80

If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $124,100) 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. Depreciation is due to obsolescence rather than wear and tear.

Required:

What is the financial advantage (disadvantage) of making the 73,000 starters instead of buying them from an outside supplier?

Answer 1

	Cost per unit	Make	Buy	Explanation
Direct materials	7	7		Can be avoidd by buying
Direct labor	2.8	2.8		Can be avoidd by buying
Supervision	1.7	1.7		Can be avoidd by buying
Depreciation	1.2	0		Sunk Cost
Variable manufacturing overhead	0.6	0.6		Can be avoidd by buying
Rent	0.5	0		Allocated Cost
Outside Purchase Price		0	13.4
Total product cost	13.8	12.1	13.4
The company should make the starters, rather than continuing to buy from the outside supplier. Makistarters will result in a $1.30 per starter cost savings, or a total savings of $94,900 per period: $1.30 per starter × 73000 starters = $94900