Exercise 12-11 Make or Buy Decision [LO12-3] Han Products manufactures 27,000 un

Question

Exercise 12-11 Make or Buy Decision [LO12-3] Han Products manufactures 27,000 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 Total cost per part $ 3.50 10.00 2.50 12.00 s 28.00 An outside supplier has offered to sell 27,000 units of part S-6 each year to Han Products for $22 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 $77,000 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 supplier. Required What is the financial advantage (disadvantage) of accepting the outside supplier's offer?

Explanation / Answer

Differential analysis :

Financial advantage of accepting the outside supplier's offer is (617000-594000) = 23000

Make Buy Direct material 94500 Direct labour 270000 Variable overhead 67500 Fixed overhead (27000*12*1/3) 108000 Opportunity cost 77000 Purchase cost (27000*22) 594000 Total 617000 594000

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