Han Products manufactures 32,000 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 | $ | 3.60 |
| Direct labor | 9.00 | |
| Variable manufacturing overhead | 2.40 | |
| Fixed manufacturing overhead | 6.00 | |
| Total cost per part | $ | 21.00 |
An outside supplier has offered to sell 32,000 units of part S-6 each year to Han Products for $19 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 $82,000. 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?
Calculate financial advantage (disadvantage) of accepting the outside supplier’s offer?
| Make | Buy | |
| Direct material (32000*3.6) | 115200 | |
| Direct labour (32000*9) | 288000 | |
| Variable manufacturing overhead (32000*2.4) | 76800 | |
| Avoidable fixed cost (2*32000) | 64000 | |
| Opportunity cost | 82000 | |
| Purchase cost (32000*19) | 608000 | |
| Total | 626000 | 608000 |
If accepting the outside supplier's offer then advantage is (626000-608000) = 18000. net operating income will increase by 18000
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