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27 March, 14:12

Han Products manufactures 29,000 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 $3.70

Direct labor 12.00

Variable manufacturing overhead 2.30

Fixed manufacturing overhead 9.00

Total cost per part $27.00

An outside supplier has offered to sell 29,000 units of part S-6 each year to Han Products for $38.00 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 $626,700. 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.

Required:

What is the net dollar advantage or disadvantage of accepting the outside supplier's offer? (Do not round intermediate calculations)

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Answers (1)
  1. 27 March, 14:25
    0
    Net dollar advantage of buying from supplier $ 191.700

    Explanation:

    Computations

    Cost of internal production $ 27 per unit

    Total units produced 29,000 units

    Total cost of production $ 783,000

    Cost of purchase $ 38 per unit

    Incremental cost of production $ 9 per unit

    Total incremental cost incurred in buying from outside -

    29,000 * $ 9 $ 261,000

    Add: Fixed costs retained (29,000 units * $ 9 * 2/3) = $ 174,000

    Total incremental costs $ 435,000

    Rental Income $ 626,700

    Net dollar advantage of buying from supplier $ 191.700
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