Han Products manufactures 24.000 units of part S-6 each year for use on its prod
ID: 2476948 • Letter: H
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 dollar 43.50 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 dollar 646,600. 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. Required: Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.) How much will profits increase or decrease if the outside supplier's offer is accepted?Explanation / Answer
Answer
Answer a
Figures in $
Per unit Differential costs
24000 units
Make
Buy
Make
Buy
Particulars
Cost of purchasing
43.5
1044000
Cost of making
Direct materials
4.3
103200
Direct labour
6
144000
Variable overhead
2.8
67200
Fixed overhead
12
8
288000
192000
(192000/24000)
(288000*2)/3
Rent income
-26.94
-646600
(-646600/24000)
25.1
24.56
602400
589400
Answer b
If outside supplier’s offer is accepted , Profit will increase by $ 13000 ($ 602400 - $ 589400).
Figures in $
Per unit Differential costs
24000 units
Make
Buy
Make
Buy
Particulars
Cost of purchasing
43.5
1044000
Cost of making
Direct materials
4.3
103200
Direct labour
6
144000
Variable overhead
2.8
67200
Fixed overhead
12
8
288000
192000
(192000/24000)
(288000*2)/3
Rent income
-26.94
-646600
(-646600/24000)
25.1
24.56
602400
589400
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