Han Products manufactures 30,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 30,000 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 $3.60
Direct labor 10.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 9.00
Total cost per part
$25.00

An outside supplier has offered to sell 30,000 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 $80,000. 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?

Total cost $

(b) How much will profits increase or decrease if the outside supplier's offer is accepted?

Profits would by $

Explanation / Answer

Original Cost: Total Cost = 25*30,000 = 750,000 If supplier's offer is accepted, Cost of purchased = $21*30,000 = 630,000 Rented equipment revenue = 80,000 Original Fixed overhead cost = 9*30,000 = 270,000 Remained Fixed overhead cost = 180,000 Total Cost = 630,000+180,000 - 80,000 = 730,000 It cost 20,000 lower if offer accepted

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