Question
Han Products manufactures 42,500 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 42,500 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 as follows: |
Direct materials | $ | 4.75 | |
Direct labour | 10.75 | ||
Variable overhead | 3.75 | ||
Fixed overhead | 9.75 | ||
Total cost per part | $ | 29.00 | |
An outside supplier has offered to sell 42,500 units of part S-6 each year to Han Products for $25.75 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 $94,000. However, Han Products has determined that two-thirds of the fixed overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.
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