Han Products manufactures 31,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 31,000 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 31,000 units of part S-6 each year to Han Products for $18 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 $81,000. 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.

Direct materials $ 3.50 Direct labor 8.00 Variable manufacturing overhead 2.50 Fixed manufacturing overhead 6.00 Total cost per part $ 20.00

Explanation / Answer

Differential analysis :

Company should accept the offer because offer increase net income by 19000.

Make Buy Direct material 108500 Direct labour 248000 Variable manufacturing overhead 77500 Fixed manufacturing overhead (31000*6/3) 62000 Opportunity cost 81000 Purchase cost 558000 Total 577000 558000

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