Han Products manufactures 34,000 units of part S-6 each year for use on its prod
ID: 2408784 • Letter: H
Question
Han Products manufactures 34,000 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 34,000 units of part S-6 each year to Han Products for $21 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 $84,000. 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?
Direct materials $ 3.80 Direct labor 11.00 Variable manufacturing overhead 2.20 Fixed manufacturing overhead 6.00 Total cost per part $ 23.00Explanation / Answer
Net Financial advnatge / Disadvantage BUY MAKE Net Effect on income Cost f buying (34000*21) 714000 714000 Cost of Manufacturing Material (34000*3.80) 129200 -129,200 Labour (34000*11) 374000 -374,000 Variable OH (34000*2.20) 74800 -74,800 Fixed OH (34000*6*1/3) 68000 -68000 Annual rental income -84000 -84000 Net decrease in income 630000 646000 -16,000 Net financial disadvantage of manufacture is ($16000)
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