Question

Han Products manufactures 33,000 units of part S-6 each year for use on its production line....

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 $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 $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?

Homework Answers

Answer #1
Per unit Total 33000 units
Make Buy Make Buy
Direct materials 3.70 122100
Direct labor 10.00 330000
Variable manufacturing overhead 2.30 75900
Fixed manufacturing overhead traceable 4.00 132000
Opportunity cost 83000
Purchase cost 20.00 660000
Total 743000 660000
Difference in favor of buying = 743000-660000 = $83000
Financial (disadvantage) (83000)
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