Question

Exercise 12-11 Make or Buy Decision (LO12-3] 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 5-6 is: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 3.60 11.00 2.40 6.00 $ 23.00 An outside supplier has offered to sell 28,000 units of part 5-6 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 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?

Answer 1

	Make	Buy	Net Income Increase (Decrease)
Direct material	28,000*$3.60 = $100,800		$                                                   100,800
Direct labor	28,000*$11 = $308,000		$                                                   308,000
Variable overhead	28,000*$2.40 = 67,200		$                                                      67,200
Fixed manufacturing overhead	28,000*$6 = $168,000	$168,000*2/3 = $112,000	$                                                      56,000
Purchase cost		28,000*$21 = $588,000	$                                                 (588,000)
Opportunity cost		$                                  (78,000)	$                                                      78,000
Total Cost	$                                 644,000	$                                  622,000	$                                                      22,000

COmpany should accept outside supplier offer. so they can save $22,000

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