Question

# (CO H) Hanson, Inc. makes 10,000 units per year of a part called a prositron for...

(CO H) Hanson, Inc. makes 10,000 units per year of a part called a prositron for use in one of its products. Data concerning the unit production costs of the prositron follow. Direct materials \$250 Diret labor 125 Variable manufacturing OH 50 Fixed manufacturing OH 150 Total \$575 An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to discontinue making the prositrons, 20% of the above fixed manufacturing overhead costs could be avoided. Required: Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the prositrons. If the outside supplier offers to sell the prositrons for \$425 each, should Hanson, Inc. accept the offer? Fully support your answer with appropriate calculations.

Solution:

 Differential Analysis- Troy Engines Ltd - Making Prositron (alt 1) or Buying Prositron (Alt2) Particulars Making Prositron (Alt 1) Buying Prostiron (Alt 2) Financial advantage (Disadvantage) of buying (Alternative 2) Costs: Purchase Price (10000*\$425) \$0.00 \$4,250,000.00 -\$4,250,000.00 Direct material \$2,500,000.00 \$0.00 \$2,500,000.00 Direct Labor \$1,250,000.00 \$0.00 \$1,250,000.00 Variable overhead \$500,000.00 \$0.00 \$500,000.00 Avoidable Fixed Overhead (\$150*10000*20%) \$300,000.00 \$0.00 \$300,000.00 Total Cost \$4,550,000.00 \$4,250,000.00 \$300,000.00

As buying cost is lower than making cost resulting in net financial advantage of \$300,000, therefore outside supplier offer must be accepted.

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