Han Products manufactures 33,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 33,000 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 33,000 units of part S-6 each year to Han Products for $20 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 $83,000. 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 $ 3.70 Direct labor 10.00 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 12.00 Total cost per part $ 28.00

Explanation / Answer

Analaysis :

Financial advantage of accepting the outside supplier's offer is $83000

Make Buy Direct material 122100 Direct labour 330000 Variable manufacturing overhead 75900 Fixed Manufacturing overhead (33000*12/3) 132000 Opportuntiy cost 83000 Purchase cost (33000*20) 660000 Total 743000 660000

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