Make or Buy Decision 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. 1. What is the total fixed manufacturing overhead for the current status quo? 2. What is the total fixed manufacturing overhead if part S-6 were purchased from the outside supplier? 3. Based on 1 and 2, how much total fixed overhead is relevant in the analysis? 4. Which item is opportunity cost? 5. What is the cost differential between make and buy options (cost of make minus cost of purchasing)? Use a minus sign if the differential is negative. 6. Should the company accept the outside suppliers offer?