Han Products manufactures 22,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 22,000 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 $ 3.90 6.00 3.80 15.00 Total cost per part $28.70 An outside supplier has offered to sell 22,000 units of part S-6 each year to Han Products for $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 $532,600. 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.) Per Unit Differential Costs 22,000 Units Make Buy Make Buy Cost of purchasing Cost of making Direct materials Direct labor Variable overhead Fixed overhead Total cost 0.00 0.00S 0 S b. How much will profits increase or decrease if the outside supplier's offer is accepted? Profit would

Explanation / Answer

a) Differential analysis :

b) Profit would Decrease by 957000-411400-532600 =(13000)

Per unit differential cost 22000 units Make Buy Make Buy Cost of purchasing 43.50 957000 Cost of making Direct materials 3.90 85800 Direct labour 6.00 132000 Variable overhead 3.80 83600 Fixed overhead 5.00 110000 Total cost 18.70 43.50 411400 957000

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