Exercise 12-11 Make or Buy Decision [LO12-3] Han Products manufactures 28,000 un
ID: 2562254 • Letter: E
Question
Exercise 12-11 Make or Buy Decision [LO12-3]
Han Products manufactures 28,000 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:
An outside supplier has offered to sell 28,000 units of part S-6 each year to Han Products for $21 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 $78,000. 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?
Direct materials $ 3.60 Direct labor 11.00 Variable manufacturing overhead 2.40 Fixed manufacturing overhead 6.00 Total cost per part $ 23.00Explanation / Answer
*Two-thirds of the fixed manufacturing overhead is applied to part S-6 part S-6 were purchased from the outside supplier. so the manufacturing overhead is calculated on its one-third part.
Particulars Make Buy Direct materials (28000*3.60) 100800 Direct labor(28000 * 11) 308000 Variable manufacturing overhead(28000 * 2.40) 67200 Fixed manufacturing overhead(28000 * 6)*1/3 56000 Outside purchase price 588000 Rental value of space 78000 TOTAL COST 610000 588000 Profit increase for buying[610000-588000] 22000 If the outside supplier's offer has been accepted, the profit will increase by 22000. *out side purchase price = 28000 * 21 = 588000Related Questions
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