# 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.

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.