Question

Han Products manufactures 25,000 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	$	4.60
Direct labor		8.00
Variable manufacturing overhead		3.90
Fixed manufacturing overhead		12.00
Total cost per part	$	28.50

   
An outside supplier has offered to sell 25,000 units of part S-6 each year to Han Products for $49.00 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 $707,500. 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:

1. 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 25,000 Units Make Buy Make Buy Cost of purchasing Cost of making: Direct materials Direct labor Variable overhead Fixed overhead Total cost

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

	Profit would by

Answer 1

	Per unit Differential cost		25,000 Units
	Make	Buy	Make	Buy
Cost of purchasing		$ 49.00		$49*25,000 = $1,225,000
Cost of making
Direct Material	$    4.60		25,000 * $4.60 = $115,000
Direct Labour	$    8.00		25,000 * $8 = $200,000
Variable overhead	$    3.90		25,000 * $3.90 = $97,500
Fixed overhead	$ 12.00		25,000 * $12 = $300,000	$300,000*2/3 = $200,000
Total Cost	$ 28.50	$ 49.00	$                                   712,500	$                              1,425,000

Additional cost if outside supplier is accepted ($1,425,000-$712,500)	$ 712,500
Less: Rental income	$ 707,500
Profit will decrease by	$      5,000