Bawarchi Company is known for making fire screens that fit over the back of cooking grills in restaurants. Current production is 20,000 units. This is also the maximum number of screens that Bawarchi can sell. The profit associated with one unit is as follows:

Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . $15.00
Variable cost of manufacturing. . . . . . . . . . . .  . . . . 7.50
Fixed manufacturing cost . . . . . . . . . . . . . . . . . . . . . 4.50
Fixed selling and administrative cost. . . . . . . . . . . . 1.50
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.50

The company is faced with the following situation:

a. A supplier has offered to sell 20,000 screens to Bawarchi at a price of $10 each.

b. The company’s management is considering a move to manufacturing grease filters instead of fire screens. The grease filter is expected to sell for $10, and the variable cost to produce each filter is $6.80. Fixed costs will be identical to the costs associated with the manufacture of the fire screen. Selling and administrative costs per filter will be identical to those for the fire screen. If the grease filters are made, Bawarchi can still purchase the screens from the supplier

c. The military is interested in purchasing grease filters that will meet the military standards for quality and reliability for use in military kitchens. The military will pay $13.80 for each filter and is prepared to purchase up to 20,000 filters. The grease filters, if made by Bawarchi, must undergo further processing, which involves a special finishing process to meet the military standards. The special finishing process will cost $3.50 per filter in variable production cost. The special finishing process will result in loss of output of 2,000 units; thus, placing 20,000 filters into the special finishing process will yield 18,000 military grade grease filters. In addition, the special finishing process will entail spending $3.10 per filter in additional fixed cost based on a volume of 18,000 filters.

Required:

Write a one-page memorandum to the president of Bawarchi Company recommending an appropriate course of action. Attach any calculations you make in support of your recommendation(s).