Reference no: EM132933368

Question - Han Products manufactures 42,500 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 $4.75

Direct labour 10.75

Variable overhead 3.75

Fixed overhead 9.75

Total cost per part $ 29.00

An outside supplier has offered to sell 37,500 units of part S-6 each year to Han Products for $25.75 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 $94,000. However, Han Products has determined that one-third (1/3) of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.

Required -

1. What is the net dollar advantage or disadvantage of accepting the outside supplier's offer?

2. What is the annual rental value at which the company will be indifferent between the two options?