Question

(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.

Answer 1

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.