Han Products manufactures 15,000 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 $ 5.40 Direct labor 7.00 Variable manufacturing overhead 4.00 Fixed manufacturing overhead 9.00 Total cost per part $ 25.40 An outside supplier has offered to sell 15,000 units of part S-6 each year to Han Products for $44.50 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 $383,500. 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: a. Calculate the per unit and total relevant cost for buying and making the product? (Round your "per unit" answers to 2 decimal places.)
b. How much will profits increase or decrease if the outside supplier’s offer is accepted?
Make | Buy | |||
Per unit | Total | Per unit | Total | |
Direct material | 5.40 | 81000 | ||
Direct labor | 7 | 105000 | ||
Variable overhead | 4 | 60000 | ||
Fixed overhead | 3 | 45000 | ||
Purchase cost (15000*44.50) | 44.50 | 667500 | ||
Total relevant cost | 19.40 | 291000 | 44.50 | 667500 |
b) Profit increase by = (291000+383500-667500) = 7000
Han Products manufactures 15,000 units of part S-6 each year for use on its production line....
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