Question

Check my work Check My Work button is now enabledItem 7 Item 7 1.25 points Han Products manufactures 28,000 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 11.00 Variable manufacturing overhead 2.40 Fixed manufacturing overhead 6.00 Total cost per part $ 23.00 An outside supplier has offered to sell 28,000 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 $78,000. 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 (disadvantage) of accepting the outside supplier’s offer = Relevant production cost - Buying cost

= {(3.60+11+2.40)*28000 + 6*1/3*28000 + 78000} - (21*28000)

= $610000 - 588000

= $22,000