2C2D REFRIGERATOR COMPANY MANUFACTURES ICE-MAKERS FOR INSTALLATION IN...

244.

CSO: 2C2d

LOS: 2C2d

Refrigerator Company manufactures ice-makers for installation in refrigerators. The

costs per unit, for 20,000 units of ice-makers, are as follows.

Direct materials

$ 7

Direct labor

12

Variable overhead

5

Fixed overhead

10

Total costs

$34

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

a.

$600,000 vs. $560,000.

b.

$648,000 vs. $528,000.

c.

$600,000 vs. $528,000.

d.

$680,000 vs. $440,000.