Make or Buy Decision: Han Products

Han Products manufactures 20,000 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$3.40
Direct labor 8.00
Variable manufacturing overhead 2.60
Fixed manufacturing overhead 9.00
Total cost per part$23.00

An outside supplier has offered to sell 20,000 units of part S-6 each year to Han Products for $19 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 $70,000. 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 financial advantage (disadvantage) of accepting the outside supplier's offer?

© SolutionLibrary Inc. 9836dcf9d7