EXAMPLE 2- MAKE OR BUY

Specialty Metal Products, Inc. manufactures filters for use in custom over-the-range hoods. The costs per unit, for a batch of 10,000 filters, are as follows.

Direct materials	$5
Direct labor	$3
Variable manufacturing overhead	$1
Fixed manufacturing overhead	$4
Total costs	$13

Custom Kitchens has offered to sell 10,000 filters to Specialty Metal Products for $14 per filter. If Specialty Metal Products accepts Custom Kitchens offer, the facilities used to manufacture filters could be used to produce BBQ grates. Revenues from the sale of BBQ grates are estimated at $20,000, with variable costs amounting to 80% of sales. In addition, $1 per unit of the fixed overhead associated with the manufacture of filters could be eliminated. Should Specialty Metal Products accept Custom Kitchens offer?