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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:
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.

Respuesta :

Common costs allocated on the basis of machine hours. Common costs allocated on the basis of sales euros. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses.

The costs that can be avoided as a result of purchasing from the outside are relevant in a make-or-buy decision. The analysis is: Per Unit Differential Costs 30,000 Units Make Buy Make Buy Cost of purchasing $21.00 $630,000 Cost of making: Han Products Direct materials $3.60 $108,000 Direct labor 10.00 300,000 Variable overhead 2.40 72,000 Fixed overhead 3.00* 90,000 Total cost $19.00 $21.00 $570,000 $630,000

* The remaining $6 of the fixed Han Products overhead cost would not be relevant, because it will continue regardless of whether the company makes or buys the parts.

The $80,000 rental value of the space being used to produce part S-6 is an opportunity cost of continuing to produce Han Products the part internally. Thus, the complete analysis is: Make Buy Total cost, as above $570,000 $630,000 Rental value of the space (opportunity cost) 80,000 Total cost, including opportunity cost $650,000 $630,000 $20,000 Net advantage in favor of buying

Profits would increase by $20,000 if the outside supplier's offer is accepted.

EXERCISE Dropping or Retaining a Segment LO2 139Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows:

p. 609 The currency in Greece is the euro, denoted above by. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses.

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