Han Products manufactures 23,000 units of part S-6 each year for use on its prod
ID: 2577158 • Letter: H
Question
Han Products manufactures 23,000 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 Vari $ 5.20 6.00 3.40 15.00 able manufacturing overhead Fixed manufacturing overhead Total cost per part $29.60 An outside supplier has offered to sell 23,000 units of part S-6 each year to Han Products for $49.50 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 $676,700. 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 23,000 Units Make Buy Make Buy Cost of purchasing Cost of making Direct materials Direct labor Variable overhead Fixed overhead Total costExplanation / Answer
Han Products
Per Unit Differential Cost
23,000 Units
Make
Buy
Make
Buy
Cost of Purchasing
$49.50
$1,138,500
Cost of Making:
Direct Materials
$5.20
$119,600
Direct Labor
$6.00
$138,000
Variable Manufacturing overhead
$3.40
$78,200
Fixed manufacturing overhead
$5.00
$115,000
Total Cost
$19.60
$49.50
$450,800
$1,138,500
So, the avoidable portion of fixed manufacturing cost is relevant cost.
Avoidable fixed manufacturing overhead = $15 x 23,000 x 1/3 = $115,000
Fixed manufacturing overhead per unit = $115,000/23,000 = $5.
Purchasing cost of 23,000 units of part S-6 $1,138,500
Less: Rent revenue from use of facilities $676,700
Net Cost of purchasing $461,800
Less: Cost of Making 23,000 units of Part S-6 $450,800
Excess cost of purchasing $11,000
Hence, the profits decrease by $11,000 when Han Products accepts the outside supplier’s offer of $49.50 for 23,000 units of the part S-6.
The rent revenue of $676,700 is the rental value of space when the part S-6 is purchased from outside supplier. Hence, the same is treated as relevant revenue when the company opts to Buy the part and the same would be treated as opportunity cost, when the company opts to Make the part.
Hence, rent revenue is deducted from total cost of purchasing $1,138,500 to arrive at the net cost of purchasing as follows,
Net Cost of purchasing $1,138,500 - $676,700 = $461,800
Increase/decrease in profits = $461,500 - $450,800 = $11,000
Decrease in profits = $11,000
Alternatively, the same could be treated as opportunity cost of making the product and added to the total cost of making,
Cost of making part S-6 $450,800
Add: opportunity cost $676,700
Total cost of Making $1,127,500
Total cost of purchasing $1,138,500
Decrease in profits $11,000
Per Unit Differential Cost
23,000 Units
Make
Buy
Make
Buy
Cost of Purchasing
$49.50
$1,138,500
Cost of Making:
Direct Materials
$5.20
$119,600
Direct Labor
$6.00
$138,000
Variable Manufacturing overhead
$3.40
$78,200
Fixed manufacturing overhead
$5.00
$115,000
Total Cost
$19.60
$49.50
$450,800
$1,138,500
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