Question

Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments' offer, the facilities used to manufacture ice-makers could be used to produce water filtration units. Revenues from the sale of water filtration units are estimated at $80,000, with variable costs amounting to 60% of sales. In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated.

For Refrigerator Company to determine the most appropriate action to take in this situation, the total relevant costs of make vs. buy, respectively, are:________

Answer 1

$680,000 vs $440,000

Step-by-step explanation:

Total Costs to Make :

Manufacturing Costs ($34 x 20,000) $680,000

Total $680,000

Total Cost to Buy :

Purchase Price ($28 x 20,000) $560,000

Less Savings :

Fixed overhead ($6 x 20,000) ($120,000)

Total Cost $440,000