Han Products manufactures 16,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 16,000 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 16,000 units of part S-6 each year to Han Products for $50.00 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 $442,600. 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

Explanation / Answer

Per unit differential costs 16000 units Make Buy Make Buy Cost of Purchasing 50 357400 (50*16000-442600) Cost of Making Direct Material 5.1 81600 Direct Labor 7 112000 Variable Overhead 3.8 60800 Fixed Overhead 18 288000 192000 (288000*2/3) Total Cost 33.9 50 542400 549400 If outsider offer is accepted the profit will decrease by $7,000 7000

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