Question

Han Products manufactures 26,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 4.00 9.00 2.00 9.00 $ 24.00 An outside supplier has offered to sell 26,000 units of part S-6 each year to Han Products for $20 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 $76,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part 5-6 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? LLLLLLLLLLLLLLLLLLLL LLLLLLLLL Financial advantage LLLLLLLLLLLLLLLL LLLLLLLL

Answer 1

Solution

Financial advantage

$ 24,000

Working

Differential Analysis
	Make	Buy
Direct material	$ 104,000
Direct labor	$ 234,000
Variable Overheads	$ 52,000
Fixed overhead	$ 78,000
Purchase price		$ 520,000
Additional benefit from Buying from outside		-$ 76,000
Total relevant Cost	$ 468,000	$ 444,000