Question

Han Products manufactures 25,000 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: 4,70 Direct materials Direct labor 8.00 3.40 Variable manufacturing overhead Fixed manufacturing overhead 15.00 $31.10 Total cost per part An outside supplier has offered to sell 25,000 units of part S-6 each year to Han Products for $50.00 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 $717,500. 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: a. Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.) Per Unit Differential 25,000 Units Costs Buy Make Buy Make Cost of purchasing Cost of making: Direct materials Direct labor Variable overhead Fixed overhead Total cost

Answer 1

only the costs that can be avoided while buying instead of making will be considered.

other unavoidable costs are irrelevant for decision making as they will occur in both the situation.

	unit differential cost		25000 units
	make	Buy	make	buy
cost of purchasing		$50		$1,250,000[25000*$50]
cost of making
Direct material	$4.7		$117,500[$4.7*25000]
Direct Labor	$8.00		$200,000[$8*25000]
Variable overehead	$3.40		$85000[$3.40*25000]
fixed overhead*	$5.00		$125,000[$5*25000]
Total cost	$21.1	$50	$527,500	$1,250,000

* avoidable costs =1/3rd

=15*1/3

=$5

(2)if the offer is accepted

the cost of making would be saved also there will be cash inflow in form of renting of facilities used for production.

profit increase or (decrease)

= (avoidable costs + renting of facilities used for production)-cost of buying

=(527,500+$717,500)-1,250,000

= - 5,000$

there will be decrease in profit by $5000.