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    Make or Buy Decision: Han Products

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    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?

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    Solution Summary

    Excel analysis of a "make or buy" decision for Han Products.