Delta Company produces a single product. The cost of producing and selling a single unit of this
product at the company’s normal activity level of 60,000 units per year is:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.10
Direct labor…………………………………. $3.80
Variable manufacturing overhead ……………….. $1.00
Fixed manufacturing overhead ………………….. $4.20
Variable selling and administrative expense ……….. $1.50
Fixed selling and administrative expense ………….. $2.40
The normal selling price is $21 per unit. The company’s capacity is 75,000 units per year. An order
has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit.
This order would not affect regular sales or the company’s total fixed costs.
Required:
1. What is the financial advantage (disadvantage) of accepting the special order?
2. As a separate matter from the special order, assume the company’s inventory includes 1,000
units of this product that were produced last year and that are inferior to the current model.
The units must be sold through regular channels at reduced prices. What unit cost is relevant
for establishing a minimum selling price for these units? Explain.
EXERCISE 12–10 Make or Buy Decision LO12–3
Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors
from a supplier for the price of $8.40 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 $9.20 as shown below:
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
If Futura decides to make the starters, a supervisor would have to be hired (at a salary of
$60,000) 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 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:
What is the financial advantage (disadvantage) of making the 40,000 starters instead of buying
them from an outside supplier?