Question

Make or Buy

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

Direct materials	$4.00
Direct labor	5.00
Variable overhead	1.00
Fixed overhead	2.00
Total costs	$12.00

Irrigation Products has offered to sell 20,000 filters to Filtration for $12 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 $47,000, 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	Answer
Cost to buy filters	Answer

Should Filtration, Inc. accept Irrigation Product’s 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.

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Answer 1