Make or Buy a Component
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 fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.
Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.