AT&T; LTE 5:15 PM ezto.mheducation.com Chepter Han Products manufactures 30,000
ID: 2572692 • Letter: A
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AT&T; LTE 5:15 PM ezto.mheducation.com Chepter Han Products manufactures 30,000 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 30,000 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 $80,000. However, Han Products has determined that two-thirds of the fioxed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier Required: 1. Calculate the per unit and total relevant cost for buying and making the product. (Round your "per unit" answers to 2 decimal places 2. How much will profits increase or decrease if the outside supplier's offer is accepted? Relerences Book& ResoucesExplanation / Answer
The costs that can be avoided as a result of purchasing from the outside are relevant in a make-or-buy decision. The analysis is:
Per Unit Differential
Costs 30,000 Units
Cost of purchasing ...................
Make
Buy
$21.00
Make
Buy
$630,000
Cost of making:
Direct materials.....................
$ 3.60
$108,000
Direct labor...........................
10.00
300,000
Variable overhead .................
2.40
72,000
Fixed overhead .....................
3.00 *
90,000
Total cost ................................
$19.00
$21.00
$570,000
$630,000
* The remaining $6 of fixed overhead cost would not be relevant, because it will continue regardless of whether the company makes or buys the parts.
The $80,000 rental value of the space being used to produce part S-6 is an opportunity cost of continuing to produce the part internally. Thus, the complete analysis is:
Make
Buy
Total cost, as above ........................................
$570,000
$630,000
Rental value of the space (opportunity cost).....
80,000
Total cost, including opportunity cost ...............
$650,000
$630,000
Net advantage in favor of buying ..................... $20,000
Profits would increase by $20,000 if the outside supplier's offer is accepted.
Cost of purchasing ...................
Make
Buy
$21.00
Make
Buy
$630,000
Cost of making:
Direct materials.....................
$ 3.60
$108,000
Direct labor...........................
10.00
300,000
Variable overhead .................
2.40
72,000
Fixed overhead .....................
3.00 *
90,000
Total cost ................................
$19.00
$21.00
$570,000
$630,000
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