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    Make or buy

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    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.

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    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