Question

Han Products manufactures 37,000 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		9.00
Variable manufacturing overhead		2.40
Fixed manufacturing overhead		6.00
Total cost per part	$	21.00

An outside supplier has offered to sell 37,000 units of part S-6 each year to Han Products for $19 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 $87,000. 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

financial advantage of accepting the outside supplier’s offer =$13000

Working

	Make	Buy
Direct materials	133200
Direct labor	333000
Variable manufacturing overhead	88800
Fixed manufacturing overhead	74000
Total cost per part		703000
Add: Opportunity Cost	87000
	716000	703000
Financial advantage of utside supplier’s offer =716000-703000	13000