Problem - Han Products manufactures 30,000 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 as follows:
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Direct materials
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$5.40
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Direct labor
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6.00
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Variable manufacturing overhead
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3.40
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Fixed manufacturing overhead
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12.00
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Total cost per part
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$26.80
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An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $42.50 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 $696,000. 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:
(a) What is the total amount of avoidable costs if Han buys the units from an outside supplier?
(b) How much will profits increase or decrease if the outside supplier's offer is accepted?