Question

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: What is the financial advantage (disadvantage) of accepting the outside supplier’s offer?

Answer 1

	Per unit
	differential costs		30000 units
	Make	Buy	Make	Buy
Cost of purchasing		$   21.00		$ 630,000.00
Cost of making:
Direct materials	$      3.60	$          -	$ 108,000.00	$                 -
Direct labor	$   10.00	$          -	$ 300,000.00	$                 -
Variable overhead	$      2.40	$          -	$   72,000.00	$                 -
Fixed overhead ($ 9 x 1/3)	$      3.00	$          -	$   90,000.00	$                 -
Total cost	$   19.00	$   21.00	$ 570,000.00	$ 630,000.00
Rental Income(Opportunity Cost)			$   80,000.00	$                 -
Total Cost (inc. opportunity cost)			$ 650,000.00	$ 630,000.00
Financial advantage of accepting the outside supplier’s offer			$ 20,000.00