Question

Award 5 out of 10.00 points Han Products manufactures 57 500 units of part 5-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is as follows: $ 6.25 12.25 Direct materials Direct labour Variable overhead Fixed overhead 10.65 Total cost per part $34.40 An outside supplier has offered to sell 57 500 units of part 5-6 each year to Han Products for $30.25 per part. If Han Products accepts this offer, the facilities now being used to manufacture part 5-6 could be Tented to another company at an annual rental of $106,000. However. Han Products has determined that two-thirds of the fixed overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier. Required: What is the net dollar advantage or disadvantage of accepting the outside supplier's offer? (Do not round intermediate calculations) Net dollar disadvantage 48,000

Answer 1

Answer to first question in the list: Fixed costs which are unavoidable as they would be incurred even if the product is bought from outside suppliers and so shall not be considered as relevant cost for deciding whether to make or buy the products. However, those fixed costs which are specifically incurred for manufacturing particular product being analyzed, shall be taken into account while evaluating whether to make or buy from supplier. That is, Allocated fixed mfg. overhead and dep. on special equipment, etc. are irrelevant and should not be considered as they would be incurred whether units are produced in the factory or bought from supplier. If certain fixed costs can be avoided by buying goods from outside supplier, such avoidable fixed costs shall be taken into account on the evaluation. Buy - [57,500 units x $6.25) - [57,500 units x $12.25] - [57,500 units x $5.25) Direct materials Direct labour Variable overhead Opportunity cost of not letting out idle capacity Avoidable fixed overhead Supplier cost Total relevant costs Make $359,375 $704,375 $301,875 $106,000 $204,125 - $1,675,750 - [57,500 units x $10.65 x (1/3) --> As (2/3)" will continue] $1,739,375 (57,500 units x $30.25] $1,739,375 Financial disadvantage of accepting the outside supplier's offer $63,625 ($1675750 - $1739375]