Han Products manufactures 20,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 20,000 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 $ 4.70 Direct labor 8.00 Variable manufacturing overhead 4.00 Fixed manufacturing overhead 15.00 Total cost per part $ 31.70 An outside supplier has offered to sell 20,000 units of part S-6 each year to Han Products for $44.50 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 $463,000. 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: Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.) How much will profits increase or decrease if the outside supplier's offer is accepted?

Explanation / Answer

1)

2) Profit would increase by $7000.

Per unit 20000 units Make Buy Make Buy Cost of purchasing 44.50-23.15=21.35 890000 - 463000 = 427000 Material 4.70 94000 Labor 8 160000 Variable overhead 4 80000 Fixed overhead 15 10 300000 200000 Total $31.70 $31.35 $634000 $627000

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