2 Exercise 12-11 Make or Buy Decision [L012-3] 10 points Han Products manufactur
ID: 2527477 • Letter: 2
Question
2 Exercise 12-11 Make or Buy Decision [L012-3] 10 points Han Products manufactures 32,000 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: Skipped Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 3.60 9.00 2.40 6.00 $21.00 eBook Print An outside supplier has offered to sell 32,000 units of part S-6 each year to Han Products for $19 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 $82,000. 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 supplien Reference Required: What is the financial advantage (disadvantage) of accepting the outside supplier's offer?Explanation / Answer
Answer
It is mentioned that 2/3 of Total Fixed Cost will still be there if the company discontinue its manufacturing,
And there is a opportunity Cost of $82,000 (Rent)
Units
32,000
Per Unit Cost
Total Cost
Direct Material
3.60
115,200
Direct Labor
9.00
288,000
Variable Mfg. Overhead
2.40
76,800
Fixed Mfg. Overhead
6.00
192,000
Total Cost
21.00
672,000
Above calculated is the Cost at 32,000 Units
So if the company Manufactures the product, then the Cost of Manufacturing 32,000 Units
Cost = Direct Material + Direct Labor + Variable Mfg. Overhead + 1/3 Fixed Cost + Opportunity Cost
= 115,200 + 288,000 + 76,800 + (2/3 * 192,000) + 82,000
Cost if company manufactures this product = $626,000
Cost if company purchases from outside = $608,000 (32,000 Units * $19)
Saving in Cost = 626,000 – 608,000
Saving in Cost if company purchases it from Outside= $18,000
Financial Advantage = $18,000
Units
32,000
Per Unit Cost
Total Cost
Direct Material
3.60
115,200
Direct Labor
9.00
288,000
Variable Mfg. Overhead
2.40
76,800
Fixed Mfg. Overhead
6.00
192,000
Total Cost
21.00
672,000
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