Question

Exercise 6-11 (Algo) Make or Buy Decision [LO6-3] Han Products manufactures 33,000 units of part S-6...

Exercise 6-11 (Algo) Make or Buy Decision [LO6-3]

Han Products manufactures 33,000 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 $ 3.70
Direct labor 10.00
Variable manufacturing overhead 2.30
Fixed manufacturing overhead 12.00
Total cost per part $ 28.00

An outside supplier has offered to sell 33,000 units of part S-6 each year to Han Products for $22 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 $83,000. 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?

determine if Financial advantage or financial disadvantage and then the $amount of it

Homework Answers

Answer #1

Solution

Financial advantage of accepting offer = $17000

Working

Differential Analysis
Make Buy
Direct material $ 122,100
Direct labor $ 330,000
Variable Overheads $ 75,900
Fixed overhead $ 132,000
Purchase price $ 726,000
Additional benefit from Buying from outside -$ 83,000
Total relevant Cost $ 660,000 $ 643,000
Total Cost of Buying $ 643,000
Total Cost of manufacturing $ 660,000
Cost saving if Outside offer is accepted $ 17,000

The cost of Buying is less than cost of manufacturing hence it is better to buy from outside.

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