Han Products manufactures 21,000 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 $ 3.50

Direct labor 9.00

Variable manufacturing overhead 2.50

Fixed manufacturing overhead 9.00

Total cost per part $ 24.00

An outside supplier has offered to sell 21,000 units of part S-6 each year to Han Products for $20 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 $71,000. 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?

Question

Porter Hunter

Business

26 February, 10:48

Han Products manufactures 21,000 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 $ 3.50

Direct labor 9.00

Variable manufacturing overhead 2.50

Fixed manufacturing overhead 9.00

Total cost per part $ 24.00

An outside supplier has offered to sell 21,000 units of part S-6 each year to Han Products for $20 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 $71,000. 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?

+3

Answers (1)

Know the Answer?

Haiden Conrad · Answer 1

Net savings of buying from outside supplier $ 29,000

Explanation:

Computations from buying S 6 from outside supplier.

Costs to produce in house - $ 24 per unit

Units produced 21,000 units

Total costs to produce in house (21,000 units * $ 24) $ 504,000

Total costs to buy from outside (21,000 units * $ 20) $ 420,000

Savings on buying from outside $ 84,000

Adjustments of costs

Continuing Fixed manufacturing overhead

($ 9 * 21,000 units) * 2/3 $ 126,000

Rental Income of manufacturing facilities $ 71,000

Continuing costs $ 55,000

Net savings of buying from outside supplier $ 29,000