Question

Han Products manufactures 32,000 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 $ 3.60
Direct labor 9.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 6.00
Total cost per part $ 21.00
An outside supplier has offered to sell 32,000 units of part S-6 each year to Han Products for $19 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 $82,000. 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:

The financial advantage (disadvantage) of accepting the outside supplier’s offer  is $ 46000

Explanation:

Han Products Manufacturers

                                             Per Unit Differential

                                                   Costs                            32000 units

                                             Make            Buy              Make         Buy

Purchases                                                 21                                    672000

Processing Cost

Direct materials                 $ 3.60                               115200    

Direct labor                           9.00                               288000

Variable Mfg overhead        2.40                               76800

Fixed Mfg overhead            2.00*                              64000                              

Total cost                          $ 17.00            21                544000           672000                

2/3 of the Fixed Mfg Cost will be charged and is not relevant if the parts are made or bought. (2/3* 6= $4)    

The facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $82,000  which is an opportunity cost.

The complete analysis would be

                                                                       Make             Buy

Total Cost                                               $544000           $ 672000

Opportunity Cost ( Rental Space)            82000                                  

Total Cost                                                $ 626000            672000

  Financial Disadvantage to buy     $ 46000

It is better to make it internally than to buy from outside supplier.