Han Products manufactures 55,500 units of part S-6 each year for use on its prod

Question

Han Products manufactures 55,500 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 as follows: Direct materials $ 6.66 Direct labour 18.50 Variable overhead 4.44 Fixed overhead 16.65 Total cost per part $ 46.25 An outside supplier has offered to sell 55,500 units of part S-6 each year to Han Products for $38.85 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 $148,000. However, Han Products has determined that two-thirds of the fixed overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier. Required: What is the net dollar advantage or disadvantage of accepting the outside supplier’s offer?

Explanation / Answer

Han products Units produced                    55,500 units Current cost details Details Amt/Unit Total Amt $ Direct Materials                         6.66              369,630 Direct Labor                       18.50           1,026,750 Variable OH                         4.44              246,420 Fixed OH                       16.65              924,075 Total cost                       46.25           2,566,875 Cost benefit of outsider's supply offer Cost of purchase                       38.85           2,156,175 Less : Rental earning            (148,000) Add: Unavoidable Fixed cost              616,050 Net Cost of the option           2,624,225 Net $ Disadvantage of the offer $      57,350.00

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