Question

Han Products manufactures 25,000 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 $ 3.90 Direct labor 8.00 Variable manufacturing overhead 2.10 Fixed manufacturing overhead 6.00 Total cost per part $ 20.00 An outside supplier has offered to sell 25,000 units of part S-6 each year to Han Products for $18 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 $75,000. 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?

Answer 1

Answer:

$25,000

Explanation:

The computation of the financial advantage or disadvantage of accepting the outside supplier’s offer is shown below:

But before that first we have to compute the relevant cost for 25,000 units which is given below:

= (Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit × number of units manufactured) + (Fixed manufacturing overhead ×  number of units manufactured × remaining portion applied)

= ($3.9 + $8 + $2.10) × 25,000 units + ($6 × 25,000 units × 1 ÷3)

= $400,000

Now  

Financial Advantage (disadvantage) of accepting the outside offer is

= (Relevant cost at 25,000 units - per part price × number of units manufactured) + (Annual rental amount)

= ($400,000 - $18 × 25,000 units) + $75,000

= $25,000

Since this amount comes in positive which signifies the financial advantage