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
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 fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.
What is the total amount of avoidable costs if Han buys the units from an outside supplier?
Total cost $
(b) How much will profits increase or decrease if the outside supplier’s offer is accepted?
Profits would by $