An outside supplier has offered to sell 30,000 units of part s-6 each year to han products for $21 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 value of $80,000. 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.

If the company choses to buy the product, its profit will increase by $20,000 ($650,000 - $630,000).

Explanation:

1. The per unit and total relevant cost for buying and making the product will be computed as follows:

Check the following attached image.

Note: In a make or buy decision, relevant costs are costs that can be avoided if the company purchases the product from an outside spplier. Therefore, only $3 ($9 x 1/3) per unit of fixed overhead costs are relevant because $6 ($9 x 2/3) of fixed overhead costs are unavoidable.

2. The amount of increase or decrease in profits if outside supplier's offer is accepted will be computed as follows:

Total relevant costs to make = $570,000

If the company choses to buy the product from outside supplier, it could earn annual rent of $80,000.

Thus, $80,000 is the opportunity cost which is being incurred when the company makes the products.

Taking the opportunity cost into considration, total cost to make = $570,000 + $80,000 = $650,000

And,

Total relevant costs to buy = $630,000

Thus,

If the company choses to buy the product, its profit will increase by $20,000 ($650,000 - $630,000).

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