Question

Han Products manufactures 47,500 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 as follows:

Direct materials $ 5.25

Direct labour 11.25

Variable overhead 4.25

Fixed overhead 10.05

Total cost per part $ 30.80

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An outside supplier has offered to sell 41,500 units of part S-6 each year to Han Products for $27.25 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 $98,000. However, Han Products has determined that one-third (1/3) of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.

Required:

1. What is the net dollar advantage or disadvantage of accepting the outside supplier’s offer? (Do not round the intermediate calculations. Round your intermediate calculations to two decimal places.)

2. What is the annual rental value at which the company will be indifferent between the two options? (Do not round the intermediate calculations. Round your intermediate calculations to two decimal places.)

Answer 1

1)Offer units = 41500 (capacity 47500 units)
	Manuf.	Purchase
Purchase price		27.25
DM	5.25
DL	11.25
V OH	4.25
F OH	11.50	7.67	(10.05*47500)/41500	11.5*2/3
Rental adv.		-2.36
Total Cost per unit	32.25	32.56
The net dollar disadvantage is there of
accepting the outside supplier's offfer.
as total costs raised to $32.56 from 32.25.
2) Annual rental value should be raised to for
been indifferent to both the options =
(32.56-32.25)*41500 = 12865
Thus, Annual Rental should be 110865 to be
indifferent.