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

Statement showing make or Buy of part S-6

The financial advantage of accepting the outside supplier’s offer

   I.e 33000units*(28-25.48)=83000$

?the amount recived as rent should be the financial advantage

MANUFACTUR$ BUY$ Direct materials 3.70 -- Direct labor 10 -- Variable manufacturing overhead 2.30 -- Fixed manufacturing overhead 12 8 (12*2/3) Cost per unit paid to outside supplier    -- 20 Total cost per part 28 28 number of units 33000 33000 Total cost 9,24,000 9,24,000 less:rent recived ----- (83000) Net Effective cost 9,24,000 8,41,000 Net cost per unit 28 25.48

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