Han Products manufactures 24,000 units of part S-6 each year for use on its prod

Question

Han Products manufactures 24,000 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 3.80 12.00 2.20 12.00 30.00 An outside supplier has offered to sell 24,000 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 $74,000. 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? Financial advantage

Explanation / Answer

Differential analysis :

If outside supplier's offer accepted the financial advantage is (602000-528000) = 74000

Make Buy Direct material 91200 Direct labour 288000 Variable manufacturing overhead 52800 Fixed manufacturing overhead 96000 Opportunity cost 74000 Purchase cost 528000 Total 602000 528000

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