Question - Han Products manufactures 21,000 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 $ 4.20
Direct labor 6.00
Variable manufacturing overhead 3.60
Fixed manufacturing overhead 12.00
Total cost per part $ 25.80
An outside supplier has offered to sell 21,000 units of part S-6 each year to Han Products for $47.50 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 $632,700. 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:
a. Calculate the per unit and total relevant cost for buying and making the product?
b. How much will profits increase or decrease if the outside supplier's offer is accepted?