2 Exercise 12-11 Make or Buy Decision [L012-3] 10 points Han Products manufactur

Question

2 Exercise 12-11 Make or Buy Decision [L012-3] 10 points Han Products manufactures 36,000 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 $ 4.00 90 2.00 9.00 eBook 23.00 Print An outside supplier has offered to sell 36,000 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 $86,000 References 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?

Explanation / Answer

1) Calculation of Financial advantage or (disadvantage) of accepting the outside supplier's offer :

Net Cost of 36,000 units under own manufacture :

= 36,000 * $23

= $828,000

Net cost of 36,000 units by way of accepting the offer :

= 36,000 * $19 + (36,000 * $9 * 2/3) - $86,000

= $684,000 + $216,000 - $86,000

= $814,000

Financial advantage of accepting the offer is in terms of reduction in costs which amounts to $14,000 ($828,000-$814,000).

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