3 Han Products for part S-6 is manufactures 23,000 units of part S-6 each year f

Question

3 Han Products for part S-6 is 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 Direct materials Direct labor s 3.70 11.00 00581Variable manufacturing overhead Fixed manufacturing overhead Total cost per part 2.30 9.00 $26.00 An outside supplier has offered to sell 23,000 units of part S-6 each year to Han Products for $19 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 $73,000 However, Han Products even if part S-6 were purchased from the outside supplier has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue What is the financial advantage (disadvantage) of accepting the outside supplier's offer? Prev 30f 4 Next>

Explanation / Answer

Avoidable variable cost = (3.7+11.0+2.3)*23000 = $      391,000 Avoidable fixed cost = 9*23000*1/3 = $        69,000 Rental receivable on facilities $        73,000 Cost of purchasing from outside = 23000*19 = $   (437,000) Financial advantage from accepting the outside supplier's offer $        96,000

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