Answered: Han Products manufactures 55,500 units…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter10: Standard Costing And Variance Analysis

Section: Chapter Questions

Problem 72P: Moleno Company produces a single product and uses a standard cost system. The normal production...

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Han Products manufactures 55,500 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	$	6.66
Direct labour		18.50
Variable overhead		4.44
Fixed overhead		16.65
Total cost per part	$	46.25

An outside supplier has offered to sell 48,000 units of part S-6 each year to Han Products for $38.85 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 $148,000. However, Han Products has determined that 30% of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.

Required:

1. What is the net dollar advantage or disadvantage of accepting the outside supplier’s offer?

What is the annual rental value at which the company will be indifferent between the two options?

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