Han Products manufactures 31,000 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 | $ | 3.50 |
Direct labor | 8.00 | |
Variable manufacturing overhead | 2.50 | |
Fixed manufacturing overhead | 6.00 | |
Total cost per part | $ | 20.00 |
An outside supplier has offered to sell 31,000 units of part S-6 each year to Han Products for $18 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 $81,000. 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 | 19,000 | |
Working Note 1: | ||
Purchase price from outside supplier | (558,000) | (31000*18) |
Saving in cost due if outside offer accepted: | ||
Direct material | 108,500 | (31000*3.5) |
Direct labour | 248,000 | (31000*8) |
variable mnufacturing OH | 77,500 | (31000*2.5) |
Saving in Fixed Overhead | 62,000 | ((31000*6)*0.33) |
Income from freed capacity | 81,000 | |
Financial Advantage | 19,000 |
Han Products manufactures 31,000 units of part S-6 each year for use on its production line....
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Han Products manufactures 29,000 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 $ 3.70 Direct labor 12.00 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 9.00 Total cost per part $ 27.00 An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $23 per part. If Han Products accepts this offer, the facilities now...
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