Question 1 - Han Products manufactures 24,000 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 as follows:
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Direct materials
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$4.70
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Direct labor
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6.00
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Variable manufacturing overhead
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2.80
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Fixed manufacturing overhead
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12.00
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Total cost per part
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$25.50
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An outside supplier has offered to sell 24,000 units of part S-6 each year to Han Products for $44.50 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 $653,000. 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 -
(a) What is the total amount of avoidable costs if Han buys the units from an outside supplier?
(b) How much will profits increase or decrease if the outside supplier's offer is accepted?
Question 2 - Birch Company normally produces and sells 39,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $47 per unit, variable costs are $19 per unit, fixed manufacturing overhead costs total $230,000 per month, and fixed selling costs total $303,000 per month.
Employment-contract strikes in the companies that purchase the bulk of the RG-6 units have caused Birch Company's sales to temporarily drop to only 14,000 units per month. Birch Company estimates that the strikes will last for two months, after which time sales of RG-6 should return to normal. Due to the current low level of sales, Birch Company is thinking about closing down its own plant during the strike, which would reduce its fixed manufacturing overhead costs by $64,000 per month and its fixed selling costs by 11%. Start-up costs at the end of the shutdown period would total $16,000. Because Birch Company uses Lean Production methods, no inventories are on hand.
Required -
1. (a) Assuming that the strikes continue for two months, compute the increase or decrease in income in closing the plant.
(b) Would you recommend that Birch Company close the Northwest plant?
2. At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant or keeping it open?