Q1) For many years Futura Company has bought starters which it installs in its standard line of farm tractors. Due to reduction in output, company has idle capacity which could be used to make starters. Chief engineer has recommended against this move, though, pointing out that the cost to make starters would be greater than 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 |
|
Supervisor would have to be hired to oversee production of starters. Though, company has enough idle tools and machinery that no new equipment would have to be bought. Rent charge above is based on space utilized in plant. Total rent on plant is $80,000 per period. Depreciation is due to obsolescence rather than wear and tear.
problem:
Create calculations illustrating how much profits will increase or decrease as a result of making starters.