Han Products manufactures 20.000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 20.000 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 as follows: An outside supplier has offered to sell 20.000 units of part S-6 each year to Han Products for $46.50 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 $515,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier. Required: What is the total amount of avoidable costs if Han buys the units from an outside supplier? (Omit the "$" sign in your response.) How much will profits increase or decrease if the outside supplier's offer is accepted? (Input the amount as positive value. Omit the "$" sign in your response.)

Explanation / Answer

Hi, Please find the calculations below: Part A: Direct materials 5.2 * 20,000 = 104000 Direct labor 7.00 * 20,000 = 140000 Variable manufacturing overhead 3.80 x 20,000 = 76000 Fixed manufacturing overhead (12.00 x 20,000) x 1/3 = 80000 Total avoidable costs = 104000 + 140000 + 76000 + 80000 = 400000 Part B: 20000 * 46.50 (Price offered by outside supplier) - 400000 (Avoidable Cost) - 515000 (Rental Income) = $15000 Increase in profit. Thanks, Aman

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