Hanson Inc, makes 10,000 units per year of a part called a prositron for use in

Question

Hanson Inc, makes 10,000 units per year of a part called a prositron for use in one of its products. Data concerning the unit production costs of the prositron follow.
Direct materials                         $250
Direct labor                              125
Variable manufacturing OH            50
Fixed manufacturing OH              150
Total                                          $575
An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to discontinue making the prositrons, 20% of the above fixed manufacturing overhead costs could be avoided.

Required: Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the prositrons. If the outside supplier offers to sell the prositrons for $425 each, should Hanson, Inc. accept the offer? Fully support your answer with appropriate calculations.

Explanation / Answer

The total Variable cost of the unit = Direct Material + Direct Labour + Variable Manufacturing O/H + Avoidable Fixed OH

= 250 + 125 + 50 + .20 * 150 = $ 455 per unit

Offer from the supplier = $ 425 per unit

So its better to buy from outside supplier.

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