Question

Exercise 10-11 Make or Buy a Component [LO10-3]

Han Products manufactures 27,000 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	$	4.40
Direct labor		7.00
Variable manufacturing overhead		2.70
Fixed manufacturing overhead		15.00
Total cost per part	$	29.10

   

An outside supplier has offered to sell 27,000 units of part S-6 each year to Han Products for $44.00 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 $665,300. 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:

a.	Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.)

        

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

    

      

Answer 1