Discussion:
Make or Buy a Component [LO3]
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:
Direct materials . . . . . . . . . . . . . . . . . . . . $ 3.60
Direct labor. . . . . . . . . . . . . . . . . . . . . . . . 10.00
Variable manufacturing overhead. . . . . . . 2.40
Fixed manufacturing overhead. . . . . . . . . 9.00
Total cost per part . . . . . . . . . . . . . . . . . . $25.00
An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 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 $80,000. However, Han Products has determined that two-thirds of the fi xed manufacturing overhead being applied to part S-6 would
continue even if part S-6 were purchased from the outside supplier.
Required:
Prepare computations showing how much profi ts will increase or decrease if the outside supplier's offer is accepted