Exercise 12-11 Make or Buy a ComponentLO12-3] Han Products manufactures 26,000 u

Question

Exercise 12-11 Make or Buy a ComponentLO12-3] Han Products manufactures 26,000 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 S 4.40 7.00 2.50 18.00 Total cost per part S 31.90 An outside supplier has offered to sell 26,000 units of part S-6 each year to Han Products for $45.00 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 $643,600. 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: 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 Differential Costs 26,000 Units 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 (517400+643600-1170000) = -9000

Per unit Total Make Buy Make Buy Cost of purchasing 45.00 1203500 Cost of making Direct material 4.40 114400 Direct labour 7.00 182000 Variable overhead 2.50 65000 Fixed overhead 6.00 156000 Total 19.90 45.00 517400 1170000

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