Question

Han Products manufactures 37000 units of part S-6 each year for use on its production line. A this level of activity, the ost per unit for part S-6 is:

Direct materials $3.60
Direct labor 9.00
Variable manufacturing overhead 2.40
Fixed manufacturing overhead 6.00
Total cost per part $21

An outside supplier has offered to sell 37,000 units of part S-6 each year to Han Products for $19 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 $87,000. 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:

$13,000

Explanation:

The computation of the financial advantage (disadvantage) of accepting the outside supplier's offer is given below:

Making cost  

Materials (37,000 × $3.60)        $133,200

Direct Labour (37,000 × $9.00) $333,000

Overhead:  

Variable (37,000 × $2.40)   $88,800

Fixed      (37000 × 6.00)      $222,000

Total making cost             $777,000

For buying cost  

outside market purchase (37,000 × 19.00) $703,000

Unavoidable fixed overheads (37000 × 6 × 2÷3) $148,000

Less: Rentout of resources           ($87,000)

Total Cost if buy                         $764,000

So, the Financial advantage of accepting the outside suppliers offer is

= $777,000 - $764,000

= $13,000