5. Han Products manufactures 30,000 units of part S- 6 each year for use on its

ID: 2607944 • Letter: 5

Question

5. 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: Direct materials . . . . . . . . . . . . . . . . . . . . . $ 3.60 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . 10.00 Variable manufacturing overhead . . . . . . . 2.40 Fixed manufacturing overhead . . . . . . . . . 9.00 Total cost per part . . . . . . . . . . . . . . . . . $ 25.00 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 fixed manufacturing overhead being applied to part S- 6 would continue even if part S- 6 were purchased from the outside supplier. Required: Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.

Explanation / Answer

particulars

C/U

Make

C/U

Buy

No. of units

30000

Direct materials

3.6

108000

Direct labor

300000

Variable manufacturing overhead

2.4

72000

Fixed manufacturing overhead

270000

180000

Suppliers price

630000

Total cost for making and buying

750000

810000

Less: cost saved(by renting the facilities)

80000

Total cost

750000

730000

Profits will increase by $20000 if the outsider supplier’s offer is accepted.