QUESTION 4:

Han Products manufactures 55,500 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	$ 6.66
Direct labour	18.50
Variable overhead	4.44
Fixed overhead	16.65
Total cost per part	$46.25

An outside supplier has offered to sell 48,000 units of part S-6 each year to Han Products for $38.85 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 $148,000. However, Han Products has determined that 30% of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.

Requirement:

Prepare computations to show the net dollar advantage or disadvantage of accepting the outside supplier's offer.