Question

Han Products manufactures 38,000 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 3.10 10.00 2.90 9.00 $ 25.00 An outside supplier has offered to sell 38,000 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 5-6 could be rented to another company at an annual rental of $88,000. 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

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

Answer 3 Purchase cost of 38000 Units = Purchase cost per unit*38000 4 = 21*38000 5 = $ 798000 7 Relevant cost to manufacture 38000 Units = Total variable cost + total relevant fixed cost + Loss of annual rent 8 = ((3.1+10+2.9) *38000)+((9*38000)/3)+88000 9 = $ 810000 11 Thus the financial advantage of accepting theoutside suppliers offer 12 = Relevant cost to manufacture - purchase cost 13 = $ 810000 -798000 14 = $ 12000 16 The financial advantage is $ 12000