Han Products manufactures 38,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 38,000 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 $ 3.10 10.00 2.90 9.00 $25.00 An outside supplier has offered to sell 38,000 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 $88,000. 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?

Explanation / Answer

Calculate relevant cost :

If company accept from outside supplier's offer then financial advantage of (810000-722000) = 88000

Make Buy Direct material 117800 Direct labour 380000 Variable overhead 110200 Fixed overhead 114000 Purchase cost 722000 Opportunity cost 88000 Total relevant cost 810000 722000

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