Han Products manufactures 33,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 33,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 3.70 10.00 2.30 12.00 $ 28.0e An outside supplier has offered to sell 33,000 units of part S-6 each year to Han Products for $20 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 $83,000 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? inancial advantage

Explanation / Answer

1. Calculate relevant cost :

b) If outside supplier's is accepted the profit will increase by (66000-660000-83000) = 83000

Make per unit Buy per unit Make cost Buy cost Cost of purchasing 20.00 660000 Cost of making Direct material 3.70 122100 Direct labour 10.00 330000 Variable overhead 2.30 75900 Fixed overhead 4.00 132000 Total 20.00 20.00 660000 660000

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