Exercise 12-11 Make or Buy Decision [LO12-3] Han Products manufactures 29,000 un
ID: 2408310 • Letter: E
Question
Exercise 12-11 Make or Buy Decision [LO12-3] Han Products manufactures 29,000 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part 3.70 12.00 2.30 9.00 27.00 An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $23 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 $79,000. 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 financial advantage (disadvantage) of accepting the outside supplier's offer?Explanation / Answer
Statement of Cost if Offer is Accepted
Particulars
Amount
Amount
Cost Price of Material
(29000*23)
$ 667,000.00
Cost to be Incurred
$ 667,000.00
Less: Benefit to be Achived
$ 79,000.00
Net Cost incurred
$ 588,000.00
Statement of Cost if Offer is not Accepted
Particulars
Amount
Amount
Cost to be Incurred
Direct Material
(29000*3.7)
$ 107,300.00
Direct Labor
(29000*12)
$ 348,000.00
Variable Manufacturing Overheads
(29000*2.3)
$ 66,700.00
Avoidable Fixed Cost
(261000/3*1)*
$ 87,000.00
Total Cost
$ 609,000.00
*Total fixed cost (9*29000)
Statement of Comparative cost
Cost If offer is Not Accepted
$ 609,000.00
Cost if Offer is Accepted
$ 588,000.00
Net benefit by accepting offer
$ 21,000.00
There is a financial advantage in accepting outside supplier's offer. The value of benefit is $ 21000.00
Notes
1) In Decision making Fixed cost is not considered exept fixed cost is avoidable.
2) Avoidable fixed cost is considered as a cost if offer is not accepted. Alternatively it could be taken as benefit to be lost if offer is not accepted.
3) The extra cost in Purchasing S-6 is compensated by extra income which will be earned only of offer is accepted so it is deducted from purchase cost of S-6.
Statement of Cost if Offer is Accepted
Particulars
Amount
Amount
Cost Price of Material
(29000*23)
$ 667,000.00
Cost to be Incurred
$ 667,000.00
Less: Benefit to be Achived
$ 79,000.00
Net Cost incurred
$ 588,000.00
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