Question

Han Products manufactures 27,000 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	$	4.90
Direct labor		6.00
Variable manufacturing overhead		3.50
Fixed manufacturing overhead		12.00
Total cost per part	$	26.40

   

An outside supplier has offered to sell 27,000 units of part S-6 each year to Han Products for $40.50 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 $591,700. 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 27,000 Units Make Buy Make Buy Cost of purchasing Cost of making: Direct materials Direct labor Variable overhead Fixed overhead Total cost $0.00 $0.00 $0 $0

b.	How much will profits increase or decrease if the outside supplier’s offer is accepted?

    

	Profit would by

      

Answer 1

1.)
Particulars	Make	Buy
Cost of purchasing		$                        10,93,500
Cost of making:
Direct materials	$                1,32,300
Direct labour	$                1,62,000
Variable OH	$                   94,500
Fixed OH	$                3,24,000	$                           2,16,000
Rental opportunity		$                         -5,91,700
Total relevant cost	$                7,12,800	$                           7,17,800
Units	27,000	27,000
Unit cost	$                     26.40	$                                26.59
2.)
Particulars	Costs
Proposal accepted	$                7,17,800
Proposal rejected	$                7,12,800
Additional cost if accepted	$                      5,000
Profit would
Decrease by	$                      5,000

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