Han Products manufactures 29,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 29,000 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $ 5.20 6.00 3.50 18.00 Total cost per part S 32.70 An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $41.50 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 $602,200. 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 Required: a. Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.) er Unit Differe 29,000 Units Costs Make Buy Make Buy Cost of purchasing Cost of making Direct materials Direct labor Variable overhead Fixed overhead Total cost b. How much will profits increase or decrease if the outside supplier's offer is accepted?

Explanation / Answer

a) Relevant cost :

b) Profit would decrease by (600300+602200-1203500) = -1000

Per unit Total Make Buy Make Buy Cost of purchasing 41.50 1203500 Cost of making Direct material 5.20 150800 Direct labour 6.00 174000 Variable overhead 3.50 101500 Fixed overhead 6.00 174000 Total 20.70 41.50 600300 1203500

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