Han Products manufactures 20.000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 20.000 units of part S-6 each year for use on its production line. At this level of activity the cost per unit for part S-6 is as follows: An outside supplier has offered to sell 20.000 units of part S-6 each year to Han Products for $46.50 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $515,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier. Required: What is the total amount of avoidable costs if Han buys the units from an outside supplier? (Omit the " $ " sign in your response.) How much will profits increase or decrease if the outside supplier's offer is accepted?(Input the amount as positive value. Omit the " $ " sign in your response.)

Explanation / Answer

For 20000 units, Fixed cost pu = $12. So Total FC = 20000*$12 = $240,000 Total VC pu = 5.20+7.00+3.80 = $16 pu So Total VC = 20000*$16 = $320,000 SO Total Cost = FC + VC = 240000+320000 = $560,000 .............(A) 2/3rd of FC = (2/3)*$240,000 = $160,000 .......(B) This will be incurred even after buying from Outside supplier. So Avoidable costs is Total FC - Non Avoidable costs = 240,000-160000=$80,000 ...Ans(1) If Outside suppliers offer is accepted, Cost of Part = 20000*$46.50 = $930,000 Add Non avoiddable cost = $160,000 Less Rental Income $515,5000 ------------------------------------------ Net Loss = $575,000 ...................Ans (2) --------------------------------------

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