Question

Han Products manufactures 21,000 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 $ 3.50
Direct labor 9.00
Variable manufacturing overhead 2.50
Fixed manufacturing overhead 9.00
Total cost per part $ 24.00
An outside supplier has offered to sell 21,000 units of part S-6 each year to Han Products for $20 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 $71,000. 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:

Net savings of buying from outside supplier                       $ 29,000

Explanation:

Computations from buying S 6 from outside supplier.

Costs to produce in house -                                                  $ 24 per unit

Units produced                                                                       21,000 units

Total costs to produce in house ( 21,000 units * $ 24)        $ 504,000

Total costs to buy from outside ( 21,000 units * $ 20)         $ 420,000

Savings on buying from outside                                            $  84,000

Adjustments of costs

Continuing Fixed manufacturing overhead

( $ 9 * 21,000 units) * 2/3                               $ 126,000

Rental Income of manufacturing facilities     $  71,000            

Continuing costs                                                                    $ 55,000  

Net savings of buying from outside supplier                       $ 29,000