Han Products manufactures 37000 units of part S-6 each year for use on its produ

Question

Han Products manufactures 37000 units of part S-6 each year for use on its production line. A this level of activity, the ost per unit for part S-6 is Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part 3.60 9.00 2.40 6.00 21.00 An outside supplier has offered to sell 37000 units of part S-6 each year to Han Products for $19 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 $87000 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: What is the financial advantage (disadvantage) of accepting the outside supplier's offer? inancial advantage

Explanation / Answer

Cost If Make Materials 37000X3.60 133,200 Direct Labour 37000X9.00 333,000 Overhead: Variable 37000X2.40    88,800 Fixed 37000X6.00 222,000 Total Cost if make 777,000 Cost If Buy Purchase from outside market 37000X19.00 703,000 Unavoidable fixed overheads 37000X6X2/3 148,000 Less: Rentout of resources (87,000) Total Cost if buy 764,000 Financial advantage of accepting the outside suppliers offer (777,000-764,000)    13,000

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