Han Products manufactures 34,000 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 | $ | 3.80 |
| Direct labor | 11.00 | |
| Variable manufacturing overhead | 2.20 | |
| Fixed manufacturing overhead | 6.00 | |
| Total cost per part | $ | 23.00 |
An outside supplier has offered to sell 34,000 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 $84,000. 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?
| Net Financial advnatge / Disadvantage | ||||||
| BUY | MAKE | Net Effect on income | ||||
| Cost f buying (34000*21) | 714000 | 714000 | ||||
| Cost of Manufacturing | ||||||
| Material (34000*3.80) | 129200 | -129,200 | ||||
| Labour (34000*11) | 374000 | -374,000 | ||||
| Variable OH (34000*2.20) | 74800 | -74,800 | ||||
| Fixed OH (34000*6*1/3) | 68000 | -68000 | ||||
| Annual rental income | -84000 | -84000 | ||||
| Net decrease in income | 630000 | 646000 | -16,000 | |||
| Net financial disadvantage of manufacture is ($16000) | ||||||
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