Han Products manufactures 26,000 units of part S-6 each year for use on its prod
ID: 2467091 • Letter: H
Question
Han Products manufactures 26,000 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 26,000 units of part S-6 each year to Han Products for $45.00 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 $702,400. 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 26,000 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
Solution:
a) Calculation of per unit and total relevant cost for buying and making the product:
The costs that are relevant in make or buy decision are those costs that can be avoided as a result of purchasing from the outside. The analysis is as follows:
*The remaining (15 - 15*2/3) 10 of fixed manufacturing overhead costs would not be relevant, since it will continue regardless of whether the company makes or buys the parts.
b) Calculation of profits will increase or decrease if the outside supplier’s offer is accepted?
Per unit differential costs 26,000 Units Make Buy Make Buy Cost of purchasing 45 1,170,000 Cost of making: Direct Materials 4.7 122,200 Direct Labour 6 156,000 Variable Manufacturing Overhead 2.4 62,400 Fixed Manufacturing Overhead 5 130,000 Total Cost per unit 18.1 45 470,600 1,170,000Related Questions
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