Question

Han Products manufactures 30,000 units of part 5-6 each year for use on its production line. At this level of activity, the cost per unit for part 5-6 is: $ Direet materiala Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part 3.60 10.00 2.40 $ 25.00 An outside supplier has offered to sell 30,000 units of part 5-6 each year to Han Products for $21 per part. If Han Products accepts this offer, the facilities now being used to manufacture part 5-6 could be rented to another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part 5-6 would continue even if part 5-6 were purchased from the outside supplier. Required: What is the financial advantage (disadvantage) of accepting the outside supplier's offer?

Answer 1

Solution

Financial advantage

$ 20,000

Working

Differential Analysis
	Make	Buy
Direct material	$ 108,000
Direct labor	$ 300,000
Variable Overheads	$ 72,000
Fixed overhead	$ 90,000
Purchase price		$ 630,000
Additional benefit from Buying from outside		-$ 80,000
Total relevant Cost	$ 570,000	$ 550,000

Answer 2

Financial Advantage	20,000
Working Note 1:
Purchase price from outside supplier	(630,000)	(30000*21)
Saving in cost due if outside   offer accepted:
Direct material	108,000	(30000*3.6)
Direct labour	300,000	(30000*10)
variable mnufacturing OH	72,000	(30000*2.4)
Saving in Fixed Overhead	90,000	((30000*9)*0.33)
Income from freed capacity	80,000
Financial Advantage	20,000