Filtration, Inc. manufactures filters for use in secondary water irrigation systems. The costs per unit, for $20,000$ filters, are as follows. 

 

Direct materials $$5\mathrm{.}00$

Direct labor $6\mathrm{.}00$

Variable overhead $1\mathrm{.}00$

Fixed overhead $2\mathrm{.}00$

Total costs $$14\mathrm{.}00$

Irrigation Products has offered to sell $20,000$ filters to Filtration for $$14$ per filter. If Filtration accepts Irrigation Products offer, the facilities used to manufacture filters could be used to produce refrigerator filtration units. Revenues from the sale of refrigerator filtration units are estimated at $$50,000,$ with variable costs amounting to $50\%$ of sales. In addition, $$1$ per unit of the fixed overhead associated with the manufacture of secondary water irrigation filters could be eliminated.

Compute the following:

Cost to make filters

Cost to buy filters

Should Filtration, Inc. accept Irrigation Products offer?

Yes, the cost to purchase the filters is less than the cost to make them.

No$,$ the cost to purchase the filters is more than the cost to make them.

Make or Buy 

Answer rating: 100% (QA)

To compute the cost to make filters we add up the direct materials direct labor variable overhead ... View the full answer