Han Products manufactures 15,000 units of part S-6 each year for use on its prod

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. Required: a. Calculate the per unit and total relevant cost for buying and making the product? b. How much will profits increase or decrease if the outside supplier's offer is accepted?

Explanation / Answer

Han Products As 2/3 of the fixed would continue in Make and buy both situations, only   1/3 rd of Fixed Overhead will be relevant for differential cost calculation Make Buy a Relevant Cost Details Per unit for 15000 units Per unit for 15000 units Cost Of Purchasing          46.0     690,000.0 Cost Of Making Direct Materials             4.90         73,500.00 Direct Labor             5.00         75,000.00 Variable Manufacturing Overhead             2.80         42,000.00 Fixed Overhead             4.00         60,000.00 Rental Income from unoccupied space                 -                           -       (29.8) (446,500.0) Total cost          16.70       250,500.00        16.2     243,500.0 b Differential cost =       7,000.0 So profit will increase by $7000 if the   outside suppliers' offer is accepted.

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