Han Products manufactures 15,000 units of part S-6 each year for use on its prod
ID: 2466386 • Letter: H
Question
Han Products manufactures 15,000 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 15,000 units of part S-6 each year to Han Products for $46.00 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 $446,500. 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.)
Direct materials $ 4.90 Direct labor 5.00 Variable manufacturing overhead 2.80 Fixed manufacturing overhead 12.00 Total cost per part $ 24.70Explanation / Answer
What is the total amount of avoidable costs if Han buys the units from an outside supplier?
Direct materials $4.50 x 29,000 = $130,500
Direct labor $8.00 x 29,000 = $232,000
Variable manufacturing overhead $3.80 x 29,000 = $110,200
Fixed manufacturing overhead ($12.00 x 29,000) x 1/3 = $116,000
Total avoidable costs = $588,700
(b)
How much will profits increase or decrease if the outside supplier's offer is accepted?
(29,000 x 25.40) - (588,700 + 76,000) = $71,900 Decrease
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