| Han Products manufactures 24,000 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 | $ | 5.70 |
| Direct labor | 6.00 | |
| Variable manufacturing overhead | 2.90 | |
| Fixed manufacturing overhead | 15.00 | |
| Total cost per part | $ | 29.60 |
| An outside supplier has offered to sell 24,000 units of part S-6 each year to Han Products for $48.50 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 $696,600. However, HanProducts 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. |
1.Calculate the per unit and total relevant cost for buying and making the product?
| 2.How much will profits increase or decrease if the outside supplier’s offer is accepted? |
1.Calculate the per unit and total relevant cost for buying and making the product
| Cost Items | Total relevant cost for 24,000 parts |
|
| Make | Buy | |
| Direct Materials(24,[email protected]) | 136800 | |
| Direct Labor (24,000@6) | 144000 | |
| Variable mafg O/Head | 69600 | |
| Fixed Mafg O/H (traceable) | 360000 | |
| Outside Purchase Price | 1164000 | |
| Rental value of space(Opp.cost) | 696600 | |
| Total Cost | 1407000 | 1164000 |
| Profit increase for buying | 243000 | |
2
| How much will profits increase or decrease if the outside supplier’s offer is accepted?
If outside supplier’s offer is accepted then increase in the profit by $ 243,000 |
