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Han Products manufactures 24.000 units of part S-6 each year for use on its prod

ID: 2476948 • 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 dollar 43.50 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 dollar 646,600. 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: Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.) How much will profits increase or decrease if the outside supplier's offer is accepted?

Explanation / Answer

Answer

Answer a

Figures in $

Per unit Differential costs

24000 units

Make

Buy

Make

Buy

Particulars

Cost of purchasing

43.5

1044000

Cost of making

Direct materials

4.3

103200

Direct labour

6

144000

Variable overhead

2.8

67200

Fixed overhead

12

8

288000

192000

(192000/24000)

(288000*2)/3

Rent income

-26.94

-646600

(-646600/24000)

25.1

24.56

602400

589400

                   

Answer b

If outside supplier’s offer is accepted , Profit will increase by $ 13000 ($ 602400 - $ 589400).

Figures in $

Per unit Differential costs

24000 units

Make

Buy

Make

Buy

Particulars

Cost of purchasing

43.5

1044000

Cost of making

Direct materials

4.3

103200

Direct labour

6

144000

Variable overhead

2.8

67200

Fixed overhead

12

8

288000

192000

(192000/24000)

(288000*2)/3

Rent income

-26.94

-646600

(-646600/24000)

25.1

24.56

602400

589400