Han Products manufactures 24,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 24,000 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 24,000 units of part S-6 each year to Han Products for $48.50 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 $696,600. 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.

1.Calculate the per unit and total relevant cost for buying and making the product?

Han Products manufactures 24,000 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

1.Calculate the per unit and total relevant cost for buying and making the product

2

How much will profits increase or decrease if the outside supplier’s offer is accepted?

If outside supplier’s offer is accepted then increase in the profit by $ 243,000

Cost Items Total relevant cost
for 24,000 parts Make Buy Direct Materials(24,000@5.70) 136800 Direct Labor (24,000@6) 144000 Variable mafg O/Head 69600 Fixed Mafg O/H (traceable) 360000 Outside Purchase Price 1164000 Rental value of space(Opp.cost) 696600 Total Cost 1407000 1164000 Profit increase for buying 243000

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