Question
Han Products manufactures 32,000 units of the S-6 part each year for use on its production line. At this level of activity, the cost per
Han Products manufactures 32,000 units of the S-6 part each year for use on its production line. At this level of activity, the cost per unit of part S-6 is:
Direct materials | ps | 3.60 |
Direct labour | 9.00 | |
Variable manufacturing overhead | 2.40 | |
Fixed manufacturing costs | 6.00 | |
total cost per part | ps | 21.00 |
An outside vendor has offered to sell 32,000 units of the S-6 part each year to Han Products for $19 per part. If Han Products accepts this offer, the facility now used to manufacture the S-6 part could be leased to another company for an annual rent of $82,000. However, Han Products has determined that two-thirds of fixed manufacturing overhead costs that apply to the S-6 part would continue even if the S-6 part was purchased from the third-party vendor.
Required:
What is the financial advantage (disadvantage) of accepting the offer of the external provider?
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