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: $ 4.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part 18.00 $ 30 80 An outside supplier has offered to sell 23,000 units of part S-6 each year to Han Products for $45.00 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 $591,600. 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: 1. 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 Make Buy 23,000 Units Make Buy Cost of purchasing Cost of making Direct materials Direct labor Variable overhead Forced overhead Total cost $ 0.00 $ 0.00 0 . 0 2. How much will profits increase or decrease if the outside supplier's offer is accepted? Profit would

Answer 1

		Per Unit Differential Costs		23,000 Units
		Make	Buy	Make	Buy
	Cost of Purchasing*		19.28		443,400			Cost of Purchasing*:	PU	Total
	Cost of Making:							Outside Supplier	45.00	1,035,000
	Direct Material	4.00		92,000				Less: Opportunity Cost	25.72	591,600
	Direct Labor	6.00		138,000				(591600/23000)
	Variable OH	2.80		64,400				Net Cost of Purchasing	19.28	443,400
	Fixed OH (18*1/3)	6.00		138,000
	Total Cost	18.80	19.28	432,400	443,400
		PU
	Loss on Buying Over Manufacturing	-                    0.48
		Total
	Loss on Buying Over Manufacturing	-         11,000.00