Han Products manufactures 57,500 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 as follows:
Direct materials $ 6.25
Direct labour 12.25
Variable overhead 5.25
Fixed overhead 10.65
Total cost per part $ 34.40
An outside supplier has offered to sell 50,500 units of part S-6 each year to Han Products for $30.25 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 $106,000. However, Han Products has determined that one-third(1/3) of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.
