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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.

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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

$2.19