Han Products manufactures 22,000 units of part S-6 each year for use on its prod
ID: 2550283 • Letter: H
Question
Han Products manufactures 22,000 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 22,000 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 $72,000. 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 $ 3.60 Direct labor 10.00 Variable manufacturing overhead 2.40 Fixed manufacturing overhead 6.00 Total cost per part $ 22.00Explanation / Answer
Offer price of supplier is $ 18
Manufacturing cost relevant for decision making is = direct material + direct labour+ Variable manufacturing overhead + 1/3rd of fixed manufacturing overhead
That's = 3.6+10+2.4+(6*(1/3)) = $ 18
On comparing the outside suppliers price and relevant cost of manufacturing per units is same and it makes no difference in select of either of the both. But by accepting outside order company could rent it's premises for other company and earn an amount of $ 72,000/- which is an opportunity benefit company will loose if it chooses it's own manufacturing decision.
So outside suppliers offer need to be accepted and the advantage of accepting the outside suppliers offer compaCo can earn a total of $ 72,000/-
Finanacial advantage is $ 72,000/-
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