7 Han Products manufactures 38,000 units of part S-6 each year for use on its pr

Question

7 Han Products manufactures 38,000 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: Direct materials Direct labor Variable manufacturing overhead Pixed manufacturing overhead Total cost per part $ 3.10 10.00 2.90 02:27:54 $25.00 e8ookAn outside supplier has offered to sell 38,000 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 $88,000. 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. Print Required: ReferencesWha is the financial advantage (disadvantage) of accepting the outside supplier's offer?

Explanation / Answer

Incremental cost if the order is accepted = purchase price -manufacturing cost =19-(25-9*2/3) =19-(25-6) = 0 additional benefit in the form of rent = $ 88000 Hence net financial advantage by accepting the order = 88000 + 0 =88000 Note = since 2/3rd of fixed cost continues even if parts were purchased from outside,it is not considered in evaluating the order,as it is a sunk cost

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