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Make or buy

Please see the attached file.
1. 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.


Solution Preview

We need to compare the costs of both the alternatives
The cost of making is the avoidable costs - Costs which would not be incurred if the product is purchased. The avoidable costs are
Direct materials $ ...

Solution Summary

The solution explains how to calculate the impact on profits of a make or buy decision