Question

Han Products manufactures 40,000 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 $3.30 Direct labor 12.00 Variable manufacturing overhead Fixed manufacturing overhead 2.70 6.00 Total cost per part 24.00 An outside supplier has offered to sell 40,000 units of part S-6 each year to Han Products for $22 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 $90,000 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

Calculation of financial adveantage (disadvantage) $ 8,80,000 $ 1,32,000 Cost of buying from outside (40000 units *$22 per unit) Less: Saving in Direct Material (40000*3.3) Direct Labor (40000*12) Varaible Manufacturing Overhead (40000*2.7) Fixed Mfg Overhead (6*40000*1/3) $ 4,80,000 $ 1,08,000 $ 80,000 Benefit from rent $ 90,000 Net (financial Advantage) $ 10,000 Feel free to discuss queries. Please rate