Chapter 12 Help Sa 2 Exercise 12-11 Make or Buy Decision [LO12-3] Han Products m

Question

Chapter 12 Help Sa 2 Exercise 12-11 Make or Buy Decision [LO12-3] Han Products manufactures 37,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for 10 points part S-6 is: Skipped Direct materials Direct labor Variable nanufaeturing overheacd Fixed nanufacturing overhead Total cost per part $ 3.60 9.00 2.40 6.00 21.00 An outside supplier has offered to sell 37,000 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 $87000. 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

Relevant cost to make : Variable cost of manufacturing + Specific fixed cost + Opportunity cost

= $ 3.60 + $ 9.00 + $ 2.40 + 1/3 rd of $ 6.00 + $ 87000 / 37000 units

= $ 19.35 per part

Relevant cost to buy : Purchase price = $ 19 per part

Hence it is advisable to accept the outside suppliers offer.

Financial advantage of accepting outside suppliers offer = ($ 19.35-$19) * 37000 units = $ 12950

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