Sam manufacturers 30,000 units of part A1 each year for use on its production li

Question

Sam manufacturers 30,000 units of part A1 each year for use on its production line. At this level of activity, the cost per unit for part A1 is a s follows: An outside supplier has offered to supply 30,000 units of the part to the Company for $21 per part. If Hansen accepts this offer, the facilities now being used to manufacture the part could be rented to another company at an annual rent of $ 80,000. However, Same has determined that two-thirds of the fixed manufacturing overhead being applied to part A1 would continue even if the part were purchased from the outside supplier. How much would Hansen's profits increase or decrease if they accept the outside supplier's offer? $ Increase or decrease

Explanation / Answer

Make $25/part (30,000 units) = $750,000 total to make (-) Buy $21/part (30,000 units) = $630,000 total to buy (-) Facilities can be rented out annually for $80,000. (+) 2/3 of Fixed Manufacturing Overhead applied to making the units would continue. =2/3*(9.00/unit)*(30,000 units) = $180,000 (-) 630,000 - 80,000 + 180,000 = $730,000 Difference: $750,000 - $730,000 = $20,000 increase in profits

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