Question

Han Products manufactures 26,000 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	$	4.00
Direct labor		9.00
Variable manufacturing overhead		2.00
Fixed manufacturing overhead		9.00
Total cost per part	$	24.00

An outside supplier has offered to sell 26,000 units of part S-6 each year to Han Products for $20 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 $76,000. 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?

Answer 1

Make
Direct material ($4*26,000)	$ 104,000
Direct labor ($9*26,000)	$ 234,000
Variable manufacturing overhead ($2*26,000)	$    52,000
Fixed manufacturing overhead ($9*26,000)	$ 234,000
Total Costs	$ 624,000

Buy
Purchase price (26,000*$20)	$ 520,000
Fixed cost (234,000*2/3)	$ 156,000
Less: Rent amount Received	$ (76,000)
Total Cost	$ 600,000

Financial advantage if accepting the supplier's offer ($624,000-$600,000

$ 24,000

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