Han Products manufactures 22000 units of part S6 each year f

Han Products manufactures 22,000 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 S 4.30 8.00 3.50 12.00 Total cost per part $27.80 An outside supplier has offered to sell 22,000 units of part S-6 each year to Han Products for $44.00 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 $537,400. 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 supplien. Required a. Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.) Per Unit Differential Costs 22,000 Units Make Buy Make Bu Cost of purchasing Cost of making: Direct materials Direct labor Variable overhead Fixed overhead Total cost

Solution

a) Calculate per unit and total relevant cost :

b) Total relevant cost of making = 435600+537400 = 973000

Total relevant cost of buying = 968000

Profit would decrease by $5000

	Per unit	Total
	Making	Buying	Making	Buying
Cost of purchasing		44		968000
Cost of making
Direct material	4.30		94600
Direct labour	8.00		176000
Variable overhead	3.50		77000
Fixed overhead	4.00		88000
Total cost	19.80	44.00	435600	968000