Han Products manufactures 39,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 39,000 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 3.20 11.00 2.80 12.00 29.00 An outside supplier has offered to sell 39,000 units of part S-6 each year to Han Products for $23 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 $89,000. 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?

Explanation / Answer

1)Variable manufacturing cost= 3.2+11+2.8 = 17

2)

2)product X15 should be further processed as it will result in financial advantage of 10200

**joint cost is irrelevant as it will be incurred whether product is further processed or not.

Incremental profit /(loss) Savings saving in variable manufacturing cost [39000*17] 663000 saving in fixed manufacturing overhead [39000*12*1/3] 156000 Income from renting facilities 89000 less:purchase cost [ 39000*23] (897000) Incremental profit/ (loss) 11000 Financial advantage 11000

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