Han Products manufactures 32,000 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 9.00

Variable manufacturing overhead 2.40

Fixed manufacturing overhead 6.00

Total cost per part $ 21.00

An outside supplier has offered to sell 32,000 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 $82,000. 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?

The financial advantage (disadvantage) of accepting the outside supplier's offer is $ 46000

Explanation:

Han Products Manufacturers

Per Unit Differential

Costs 32000 units

Make Buy Make Buy

Purchases 21 672000

Processing Cost

Direct materials $ 3.60 115200

Direct labor 9.00 288000

Variable Mfg overhead 2.40 76800

Fixed Mfg overhead 2.00 * 64000

Total cost $ 17.00 21 544000 672000

2/3 of the Fixed Mfg Cost will be charged and is not relevant if the parts are made or bought. (2/3 * 6 = $4)

The facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $82,000 which is an opportunity cost.

The complete analysis would be

Make Buy

Total Cost $544000 $ 672000

Opportunity Cost (Rental Space) 82000

Total Cost $ 626000 672000

Financial Disadvantage to buy $ 46000

It is better to make it internally than to buy from outside supplier.