Han Products manufactures 28000 units of part S6 each year f

Han Products manufactures 28,000 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:

An outside supplier has offered to sell 28,000 units of part S-6 each year to Han Products for $42.50 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 $644,600. 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.

Calculate the per unit and total relevant/differential cost for buying and making the product? (Professor B Tip: When thinking of the differential cost to make a part, think of the costs you would save if you bought the part instead of making it yourself. Example 1: If I buy the part from someone else, I do not need Direct Materials to make the part myself. All of my direct material cost would be relevant. Example 2:Hypothetically, if 1/5 of my overhead remains even if you buy the part, then 4/5 of the cost can be saved if you buy it. 4/5 of the cost would be differential/relevant).  (Round your Per Unit answers to 2 decimal places.)

Solution

a) Calculate the per unit and total relevant/differential cost for buying and making the product?

b) Profit will increase by = (554400+644600-1190000) = $9000