Question

Han Products manufactures 31,000 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 $3.50
Direct labor 8.00
Variable manufacturing overhead 2.50
Fixed manufacturing overhead 6.00
Total cost per part $20.00
An outside supplier has offered to sell 31,000 units of part S-6 each year to Han Products for $18 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 $81,000. 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:
What is the financial advantage (disadvantage) of accepting the outside supplier’s offer?

Answer 1

Answer:

It is more profitable to buy the part by $81,000.

Explanation:

Giving the following information:

Number of units= 31,000

Production costs:

Direct materials $3.50

Direct labor 8.00

Variable manufacturing overhead 2.50

Avoidable Fixed manufacturing overhead= 2.00

Total cost per part $18

Purchasing price= $18

Rent= $81,000

We need to determine whether it is more profitable to make the part or buy it. Of the fixed manufacturing overhead, we will take into account only the avoidable costs.

Make in-house:

Total cost= 31,000*18= $558,000

Buy:

Total cost= 31,000*18 - 81,000= $477,000

It is more profitable to buy the part by $81,000.