What is the financial advantage (disadvantage) of accepting the outside supplier’s offer?
Han Products manufactures 23,000 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 | 11.00 | |
| Variable manufacturing |
2.30 | |
| Fixed manufacturing overhead | 9.00 | |
| Total cost per part | $ | 26.00 |
An outside supplier has offered to sell 23,000 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 $73,000. 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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