Question
Han Products manufactures 29,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit
Han Products manufactures 29,000 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 $ 3.70 Direct labor 12.00 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 9.00 Total cost per part $ 27.00 An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $23 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 $79,000. 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 impact of accepting the outside suppliers offer? (Indicate negative cash flows with a negative sign.) (See below for hints if you need them.) Hints: (1) In all of the make-or-buy questions, be sure to account for what they would have to pay the supplier to make the products for them. (2) When accounting for the fixed manufacturing overhead, you need to account for what changes, i.e., the part that can be saved, not the part that will remain.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started