Han Products manufactures 30,000 units of the S-6 part each year for use on its production line.
Question:
Han Products manufactures 30,000 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 | 10.00 | |
Variable manufacturing overhead | 2.40 | |
Fixed manufacturing costs | 9.00 | |
total cost per part | ps | 25.00 |
An outside vendor has offered to sell 30,000 units of the S-6 part each year to Han Products for $21 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 $80,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead that applies to the S-6 part would continue even if the S-6 part were purchased from the outside vendor.
Required
Calculate the relevant unit and total cost to purchase and manufacture the product?
By how much will profits increase or decrease if the outside provider's offer is accepted?
Managerial Accounting
ISBN: 978-0697789938
13th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer