accounting 350 458527

EXERCISE 13’7 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