Han Products manufactures 30,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 30,000 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 $ 3.60 Direct labor 10.00 Variable manufacturing overhead 2.40 Fixed manufacturing overhead 9.00 Total cost per part $ 25.00 An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 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 $80,000. 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. Required: What is the financial advantage (disadvantage) of accepting the outside supplier’s offer?

Explanation / Answer

Per unit 30000 units Make Buy Make Buy Cost of purchasing 21 630000 Cost of making: Direct materials 3.6 108000 Direct labor 10 300000 Variable manufacturing overhead 2.4 72000 Fixed manufacturing overhead 3 90000 Total cost 19 21 570000 630000 Make Buy Total cost 570000 630000 Opportunity cost 80000 Total relevant cost 650000 630000 Financial advantage $20000 (650000-630000)

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