Han Products manufactures 24,000 units of part S-6 each year for use on its prod
ID: 2465624 • Letter: H
Question
Han Products manufactures 24,000 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 24,000 units of part S-6 each year to Han Products for $42.50 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 $566,200. 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.
Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.)
Han Products manufactures 24,000 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:
Explanation / Answer
a)
What is the total amount of avoidable costs if Han buys the units from an outside supplier?
Direct materials $5.00 x 24,000 = $120,000
Direct labor $5.00 x 24,000 = $120,000
Variable manufacturing overhead $4.20 x 24,000 = $100,800
Fixed manufacturing overhead ($15.00 x 24,000) x 1/3 = $120,000
Total avoidable costs = $460,800
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(b)
How much will profits increase or decrease if the outside supplier's offer is accepted?
Total saving and Income=Total avoidable costs+ Rental Income =$1,027,000
The cost of buying (24,000 x 42.50) $1,020,000
Total saving= $1,027,000-$1,020,000= $7,000
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