5 Han Products manufactures 30000 units of part S 6 each yea

5. Han Products manufactures 30,000 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 . . . . . . . . . . . . . . . . . . . . . . . . 10.00 Variable manufacturing overhead . . . . . . . 2.40 Fixed manufacturing overhead . . . . . . . . . 9.00 Total cost per part . . . . . . . . . . . . . . . . . $ 25.00 An outside supplier has offered to sell 30,000 units of part S- 6 each year to Han Products for $ 21 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 $ 80,000. 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: Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.

Solution

particulars

C/U

Make

C/U

Buy

No. of units

30000

30000

Direct materials

3.6

108000

Direct labor

10

300000

Variable manufacturing overhead

2.4

72000

Fixed manufacturing overhead

9

270000

6

180000

Suppliers price

21

630000

Total cost for making and buying

25

750000

27

810000

Less: cost saved(by renting the facilities)

80000

            Total cost

750000

730000

Profits will increase by $20000 if the outsider supplier’s offer is accepted.