Han Products manufactures 16,000 units of part S-6 each year for use on its production line. At...

Question:

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?

Relevant Cost:

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:

a.

Accounts Title Per unit Make Buy Incremental Cost
No of units 16,000 16,000 0
Variable cost:
Material 5.7 91,200 0 -91,200
Direct Labor 5 91,200 0 -91,200
Manufacturing Overhead 3.9 91,200 0 -91,200
Purchase price 47.5 760,000 760,000
Total Variable cost 273,600 760,000 486,400
Fixed Overhead 18 288,000 192,000 -96,000
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


b.

As relevant cost of buying reduces total cost by 49,000.

Profit increase will be $49,000.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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