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.

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

Explanation / Answer

Cost for production

Total cost if its buying

Company will save $43,000 ($663,000-$620,000) if company make instead of purchase

Meterials 31,000*$3.50 = $108,500 Direct Labour 31,000*$8 = $248,000 Variable manufacturing overhead 31,000*$2.50 = $77,500 Fixed manufacturing overhead 31,000*$6 = $186,000 Total cost of production $                                 620,000

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