Question: Direct Materials $4.00 Direct Labor $8.00 Variable Manufacturing Overhead $2.00 Fixed Manufacturing Overhead $9.00 Total Cost Per Part $23.00 An outside supplier has offered to

Direct Materials $4.00

Direct Labor $8.00

Variable Manufacturing Overhead $2.00

Fixed Manufacturing Overhead $9.00

Total Cost Per Part $23.00

An outside supplier has offered to sell 36,000 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 $86,000. 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 advantage (disadvantage) of accepting the outside supplier's offer?

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