Question

Han Products manufactures 17,000 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		6.00
Variable manufacturing overhead		3.60
Fixed manufacturing overhead		12.00
Total cost per part	$	25.40

   
An outside supplier has offered to sell 17,000 units of part S-6 each year to Han Products for $43.00 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 $444,200. 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.)

2. How much will profits increase or decrease if the outside supplier’s offer is accepted?

Answer 1