Han Products manufactures 29,000 units of part S-6 each year for use on its prod
ID: 2559858 • Letter: H
Question
Han Products manufactures 29,000 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 $ 4.60
Direct labor 7.00
Variable manufacturing overhead 3.20
Fixed manufacturing overhead 9.00
Total cost per part $ 23.80
An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $47.00 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 $849,800. 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:
a.
Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.)
b. How much will profits increase or decrease if the outside supplier’s offer is accepted?
Explanation / Answer
1. Calculate relevant cost :
b) If outside supplier's is accepted the profit will increase by (1363000-516200-849800) = 3000
Make per unit Buy per unit Make cost Buy cost Cost of purchasing 47.00 1363000 Cost of making Direct material 4.60 133400 Direct labour 7.00 203000 Variable overhead 3.20 92800 Fixed overhead 3.00 87000 Total 17.80 47.00 516200 1363000Related Questions
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