Filtration, Inc. manufactures filters for use in secondary water irrigation systems. The costs per unit, for 20,000 filters, are as follows. Direct materials $8.00 Direct labor 9.00 Variable overhead 1.00 Fixed overhead 2.00 Total costs $20.00
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Filtration, Inc. manufactures filters for use in secondary water irrigation systems. The costs per unit, for 20,000 filters, are as follows.
| Direct materials | $8.00 |
| Direct labor | 9.00 |
| Variable |
1.00 |
| Fixed overhead | 2.00 |
| Total costs | $20.00 |
Irrigation Products has offered to sell 20,000 filters to Filtration for $20 per filter. If Filtration accepts Irrigation Products’ offer, the facilities used to manufacture filters could be used to produce refrigerator filtration units. Revenues from the sale of refrigerator filtration units are estimated at $57,000, with variable costs amounting to 50% of sales. In addition, $1 per unit of the fixed overhead associated with the manufacture of secondary water irrigation filters could be eliminated.
Compute the following:
| Cost to make filters | Answer
|
| Cost to buy filters | Answer
|
Should Filtration, Inc. accept Irrigation Product’s offer?
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