Exercise 12-7 Make or Buy a Component [LO3] Han Products manufactures 24,000 uni

Question

Exercise 12-7 Make or Buy a Component [LO3]
Han Products manufactures 24,000 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:

Direct materials ...$4.50

Direct labor...........$8.00

Variable manufacturing overhead...$4.00

Fixed manufacturing overhead.......$15.00

Total cost per part...$31.50

An outside supplier has offered to sell 24,000 units of part S-6 each year to Han Products for $51.00 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 $711,000. 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:(a)
What is the total amount of avoidable costs if Han buys the units from an outside supplier? (Omit the "$" sign in your response.)

Total cost....$

(b) 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.)

Profits would increase by ....$

Explanation / Answer

cost if we buy from outside supplier=22000*44=968000 two third of fixed cost=(12*2/3)*22000=176000 total cost=1144000 annual rent=594200 so net cost if purchase from outside supplier=1144000-594200=549800 if it manufactures then cost is=22000*24.40=536800 A)if outside supplier's offer is accepted then profit will decrease by (549800-536800)=13000 B)total amount of avoidable costs=4.50+5+2.90+(12*1/3)=16.4 per unit 22000*16.4=360800

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