Reference no: EM132535945

Han Products manufactures 33,000 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 $3.70

Direct labor 10.00

Variable manufacturing overhead 2.30

Fixed manufacturing overhead 12.00

Total cost per part $28.00

• An outside supplier has offered to sell 33,000 units of part S-6 each year to Han Products for $22 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 $83,000. 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.

Required:

Question 1: What is the financial advantage (disadvantage) of accepting the outside supplier's offer?