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

    

      

Answer 1

Answer :-

The per unit and total relevant cost for buying and making the product are as follows :-

	Per Unit Differential Costs	27,000 Units
	Make	Buy	Make (27,000 units × Make per unit costs)	Buy(27,000 units × Buy per unit cost)
Cost of purchasing		$40.50		$1,093,500 (27,000 units × $40.50)
Cost of making:
Direct materials	$4.90		$132,300 (27,000 × $4.90)
Direct labor	$6.00		$162,000 (27000 units × $6.00)
Variable overhead	$3.50		$94,500 (27000 units × $3.50)
Fixed overhead	$4.00 (Note 1)		$108,000 (27000 units × $4.00)
Total cost	$18.40	$40.50	$496,800	$1,093,500

Note 1 :- In the question it was given that 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.

Therefore,

The remaining fixed overhead costs = $12.00 × 2/3 = $8 would not be relevant as they would continue even if part S-6 were purchased from the outside supplier.

Fixed overhead - costs of making = $12 - $8 = $4