Han Products manufactures 16,000 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: $5.70
Direct labor: 5.00
Variable manufacturing overhead: 3.90
Fixed manufacturing overhead: 18.00
Total cost per part: $32.60
An outside supplier has offered to sell 16,000 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 $439,400. 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.
a. Calculate the per unit and total relevant cost for buying and making the product? (Round your Per Unit answers to 2 decimal places.)
b.How much will profits increase or decrease if the outside supplier's offer is accepted?
All the cost that has been taken into consideration while evaluating a project or an asset is called a relevant cost. All the other costs like sunk cost, opportunities cost are relevant so these costs are ignored.
Answer and Explanation:
|Accounts Title||Per unit||Make||Buy||Incremental Cost|
|No of units||16,000||16,000||0|
|Total Variable cost||273,600||760,000||486,400|
|Opportunity cost of rent Revenue||439,400||0||-439,400|
|Total Relevant Cost||1,001,000||952,000||-49,000|
|Relevant Cost per unit||62.5625||59.5||-3.0625|
As relevant cost of buying reduces total cost by 49,000.
Profit increase will be $49,000.
Learn more about this topic:
from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12