Question

Han Products manufactures 23,000 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 $ 3.70 11.00 Variable manufacturing overhead Fixed manufacturing overhead 2.30 9.ee Total cost per part $ 26.00 An outside supplier has offered to sell 23,000 units of part S-6 each year to Han Products for $22 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 $73,000. 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? Financial advantage

Answer 1

Question 1

Answer------

Financial advantage of accepting offer

$ 27,000

Working

Total Cost of Buying	$ 433,000
Total Cost of manufacturing	$ 460,000
Financial advantage of accepting offer	$ 27,000

.

Differential Analysis
	Make	Buy
Direct material	$ 85,100
Direct labor	$ 253,000
Variable Overheads	$ 52,900
Fixed overhead	$ 69,000
Purchase price		$ 506,000
Additional benefit from Buying from outside		-$ 73,000
Total relevant Cost	$ 460,000	$ 433,000

Question 2

Answer------

Financial advantage of making

$ 195,000

Working.

Total Cost of Buying	$ 756,600
Total Cost of manufacturing	$ 561,600
Financial advantage of accepting offer	$ 195,000

.

Differential Analysis
	Make	Buy
Direct material	$ 312,000
Direct labor	$ 195,000
Variable Overheads	$ 54,600
Purchase price		$ 756,600
Total relevant Cost	$ 561,600	$ 756,600