Question

5. Han Products manufactures 30,000 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 . . . . . . . . . . . . . . . . . . . . . . . . 10.00 Variable manufacturing overhead . . . . . . . 2.40 Fixed manufacturing overhead . . . . . . . . . 9.00 Total cost per part . . . . . . . . . . . . . . . . . $ 25.00 An outside supplier has offered to sell 30,000 units of part S- 6 each year to Han Products for $ 21 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 $ 80,000. 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: Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted. 

Answer 1

particulars	C/U	Make	C/U	Buy
No. of units		30000		30000
Direct materials	3.6	108000
Direct labor	10	300000
Variable manufacturing overhead	2.4	72000
Fixed manufacturing overhead	9	270000	6	180000
Suppliers price			21	630000
Total cost for making and buying	25	750000	27	810000
Less: cost saved(by renting the facilities)				80000
Total cost		750000		730000

Profits will increase by $20000 if the outsider supplier’s offer is accepted.