Han Products manufactures 25,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 25,000 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:

   

   
An outside supplier has offered to sell 25,000 units of part S-6 each year to Han Products for $49.00 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 $707,500. 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:

1. Calculate the per unit and total relevant cost for buying and making the product. (Round your "per unit" answers to 2 decimal places.)

2. How much will profits increase or decrease if the outside supplier’s offer is accepted?

Direct materials $ 4.60 Direct labor 8.00 Variable manufacturing overhead 3.90 Fixed manufacturing overhead 12.00 Total cost per part $ 28.50

Explanation / Answer

Per unit Differential cost 25,000 Units Make Buy Make Buy Cost of purchasing $ 49.00 $49*25,000 = $1,225,000 Cost of making Direct Material $    4.60 25,000 * $4.60 = $115,000 Direct Labour $    8.00 25,000 * $8 = $200,000 Variable overhead $    3.90 25,000 * $3.90 = $97,500 Fixed overhead $ 12.00 25,000 * $12 = $300,000 $300,000*2/3 = $200,000 Total Cost $ 28.50 $ 49.00 $                                   712,500 $                              1,425,000 Additional cost if outside supplier is accepted ($1,425,000-$712,500) $ 712,500 Less: Rental income $ 707,500 Profit will decrease by $      5,000

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