Han Products manufactures 16,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 16,000 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 16,000 units of part S-6 each year to Han Products for $47.50 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 $439,400. 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 cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.)

Han Products manufactures 16,000 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

Question a. Incremental Per unit Make Buy Cost No of units 16000 16000 0 Variable cost: Material 5.7 91200 0 -91200 Direct Labour 5 91200 0 -91200 Manufacturing Overhead 3.9 91200 0 -91200 Purchase price 47.5 760000 760000 Total Variable cost 273600 760000 486400 Fixed Overhead 18 288000 192000 -96000 Opportunity cost of rent Revenue 439400 0 -439400 Total Relevent Cost 1001000 952000 -49000 Relevent Cost per unit 62.5625 59.5 -3.0625 Question b. as relevent cost of buying reduces total cost by 49,000, Profit increase will be $49,000.

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