Han Products manufactures 31,000 units of part S-6 each year for use on its prod
ID: 2536907 • Letter: H
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.
Required:
What is the financial advantage (disadvantage) of accepting the outside supplier’s offer?
Direct materials $ 3.50 Direct labor 8.00 Variable manufacturing overhead 2.50 Fixed manufacturing overhead 6.00 Total cost per part $ 20.00 501000Explanation / Answer
Per unit Total Make Buy Make Buy Direct materials 3.5 108500 Direct labor 8 248000 Variable manufacturing overhead 2.5 77500 Fixed manufacturing overhead traceable 2 62000 Opportunity cost 81000 Purchase cost 18 558000 Total 577000 558000 Fnancial advantage $19000(577000-558000)
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