Han Products manufactures 28,000 units of part S-6 each year for use on its prod
ID: 2401047 • Letter: H
Question
Han Products manufactures 28,000 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 28,000 units of part S-6 each year to Han Products for $42.50 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 $644,600. 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.
Calculate the per unit and total relevant/differential cost for buying and making the product? (Professor B Tip: When thinking of the differential cost to make a part, think of the costs you would save if you bought the part instead of making it yourself. Example 1: If I buy the part from someone else, I do not need Direct Materials to make the part myself. All of my direct material cost would be relevant. Example 2:Hypothetically, if 1/5 of my overhead remains even if you buy the part, then 4/5 of the cost can be saved if you buy it. 4/5 of the cost would be differential/relevant). (Round your Per Unit answers to 2 decimal places.)
Han Products manufactures 28,000 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:
Explanation / Answer
a) Calculate the per unit and total relevant/differential cost for buying and making the product?
b) Profit will increase by = (554400+644600-1190000) = $9000
Per unit Total Make Buy Make Buy Direct material 4.60 128800 Direct labour 5.00 140000 Variable manufacturing overhead 4.20 117600 Fixed manufacturing overhead 6.00 168000 Purchase cost 42.50 1190000 Total relevant cost 19.80 42.50 554400 1190000Related Questions
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