Question

Han Products manufactures 29,000 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 $3.70
Direct labor 12.00
Variable manufacturing overhead 2.30
Fixed manufacturing overhead 9.00
Total cost per part $27.00

An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $38.00 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 $626,700. 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 net dollar advantage or disadvantage of accepting the outside supplier’s offer? (Do not round intermediate calculations)

Answer 1

Net dollar advantage of buying from supplier $ 191.700

Step-by-step explanation:

Computations

Cost of internal production $ 27 per unit

Total units produced 29,000 units

Total cost of production $ 783,000

Cost of purchase $ 38 per unit

Incremental cost of production $ 9 per unit

Total incremental cost incurred in buying from outside -

29,000 * $ 9 $ 261,000

Add: Fixed costs retained (29,000 units * $ 9 *2/3) = $ 174,000

Total incremental costs $ 435,000

Rental Income $ 626,700

Net dollar advantage of buying from supplier $ 191.700