Question

Han Products manufactures 16,000 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	$	4.10
Direct labor		6.00
Variable manufacturing overhead		2.50
Fixed manufacturing overhead		15.00
Total cost per part	$	27.60

   

An outside supplier has offered to sell 16,000 units of part S-6 each year to Han Products for $43.00 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 $403,400. 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.)

Per Unit Differential Costs      16,000 Units

Make   Buy                                   Make. Buy

Cost of purchasing                                          

Cost of making:                                               

Direct materials                                              

Direct labor                                         

Variable overhead                                          

Fixed overhead                                               

Total cost        

b.	How much will profits increase or decrease if the outside supplier’s offer is accepted?

PROFIT WOULD_______BY _________

Answer 1

1
	Per Unit Differential Costs		16,000 Units
	Make	Buy	Make	Buy
Cost of purchasing		43.00		688000
Cost of making:
Direct materials	4.10		65600
Direct labor	6.00		96000
Variable overhead	2.50		40000
Fixed overhead	5.00		80000
Total cost	17.60	43.00	281600	688000
b
	Make	Buy
Total cost	281600	688000
Opportunity cost	403400	0
Total relevant cost	685000	688000
Difference in favor of making = 688000-685000 = $3000
PROFIT WOULD decrease by 3000