Sweet Wave has discovered that its cherry pie filling it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. Sweet Wave has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Sweet Wave needs 460,000 of these units each year.

If Sweet Wave decides to buy the filling, rather than producing it, they can shift the machinery and labor to making a special gluten free pie crust it now buys from another company. Sweet Wave uses approximately 500 of these units each year. The cost of the unit is $12.66. To aid in the production of this unit, Sweet Wave would need to purchase a new machine at a cost of $2,345, and the cost of producing the units would be $9.90 a unit.

Instructions

Given the information above:

(a) Without considering the possibility of making the gluten free pie crust, evaluate whether Sweet Wave should buy or continue to make the cherry pie filling.

(b) (1) What is Sweet Wave's opportunity cost if it chooses to buy the cherry pie filling and start manufacturing the gluten free pie crust?

(2) Would it be wise for Sweet Wave to buy the cherry pie filling and manufacture the gluten free pie crust? Explain.