Han Products manufactures 18000 units of part S6 each year f

Han Products manufactures 18,000 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 18,000 units of part S-6 each year to Han Products for $47.00 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 $515,400. 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 supplier.

    

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

How much will profits increase or decrease if the outside supplier’s offer is accepted?

Profit would _____ by ____

      

Han Products manufactures 18,000 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:

Per Unit Differential Costs 18,000 Units Make Buy Make Buy Cost of purchasing Cost of making Direct materials Direct labor Variable overhead Fixed overhead $ 0.00$ 0.00 Total cost

Solution

Differential analysis: Per unit cost 18000 units Make Buy Make Buy Cost of Purchasing 0 47 0 846000 Cost of making: Direct material 4.6 0 82800 0 Direct Labour 6 0 108000 0 Variable OH 3.6 0 64800 0 Fixed OH 12 8 216000 144000 Total cost 26.2 55 471600 990000 Net increase/ Decrease in profits: Differential cost to be paid for purchase outside 572400 (990000-417600) Less: Additional rent income 515400 Net decrease in income -57000