12 Help Sas Exercise 12-11 Make or Buy Decision [LO12-3 Han Products manufacture
ID: 2560772 • Letter: 1
Question
12 Help Sas Exercise 12-11 Make or Buy Decision [LO12-3 Han Products manufactures 32.000 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 2.48 Fixed manufacturing overhead 6.80 Total cost per part $ 3.60 9.00 21.00 An outside supplier has offered to sell 32.000 units of part S-6 each year to Han Products for $19 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 $82,000. 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? Next >Explanation / Answer
Total cost of Producing 32,000 units of Part S-6 Direct material Cost (32,000 units@ 3.60 per unit) 115200 Direct labour cost (32,000 units@ 9.00 per unit) 288000 Variable manufacturing overheads(32,000 units@2.40) 76800 Fixed manufacturing Overheads(32,000 units@6) 192000 Total Cost of Manufacturing Part S-6 672,000 Total Cost of Purchasing 32,000 units of Part S-6 Supplier cost (32,000 units@ 19 per unit) 608000 Fixed cost to be incurred(192,000*2/3) 128000 Total cost when Part S-6 purchases 736,000 Additional Cost incurred when purchasing the parts 64,000 Financial Advantage when Parts are purchased from outside: Rental revenue for idle space 82,000 Less: Additional cost incurred for purchasing 64,000 Financial Advantage on purchasing from Supplier in $ 18,000
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