Han Products manufactures 19.000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 19.000 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: An outside supplier has offered to sell 19,000 units of part S-6 each year to Han Products for $37.00 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 S382.400 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. Calculate the per unit and total relevant cost for buying and making the product? How much will profits increase or decrease if the outside supplier's offer is accepted?

Explanation / Answer

Solution.

A. Calculation of relevant cost and per unit cost for buying and making the product.

B. Calculation for find the effect on profit of offer.

Particulars Per unit Differential costs 19,000 Units Make $ Buy $ Make $ Buy $ Cost of purchasing $            37.00 $ 703,000.00 Cost of Buying : Direct materials $          4.00 $    76,000.00 Direct labor $          6.00 $ 114,000.00 Variable overhead $          2.40 $    45,600.00 Fixed overhead $        12.00 $              8.00 $ 228,000.00 $ 152,000.00 Total Cost $        24.40 $            45.00 $ 463,600.00 $ 855,000.00

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