Reference no: EM132038193

Question - Han Products manufactures 21,000 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 $ 4.20

Direct labor 6.00

Variable manufacturing overhead 3.60

Fixed manufacturing overhead 12.00

Total cost per part $ 25.80

An outside supplier has offered to sell 21,000 units of part S-6 each year to Han Products for $47.50 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 $632,700. 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.

Required:

a. Calculate the per unit and total relevant cost for buying and making the product?

b. How much will profits increase or decrease if the outside supplier's offer is accepted?