Question - The fuel filter section of U-Beaut Tractors Pty currently manufactures two range of filters for its farm equipment production. The standard line of filters is produced in annual quantities of 20,000 units, whereas only 5,000 units of the special filters for their high-end tractors are produced annually on a separate line. Each of the lines requires about the same amount of floor space. The expected annual costs of the fuel filters is summarised as follows:
|
Standard
|
Special
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Total
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|
Variable cost
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|
|
|
|
Direct Materials
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$100,000
|
$30,000
|
|
|
Direct Labour
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$190,000
|
$60,000
|
|
|
Power and Water
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|
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$37500
|
|
Fixed Cost
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|
|
|
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Heating and Light
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|
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$20,000
|
|
Depreciation
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$72,000
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$40,000
|
|
|
Administration overhead allocation
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|
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$50,000
|
Filters-R-Us has offered to sell U-Beaut 20,000 standard fuel filters for $17.00 per unit. If U-Beaut accepts the offer, some of the manufacturing facilities currently used to manufacture the standard filters could be rented to a local small start-up company at an annual rent of $40,000.
DETERMINE whether U-Beaut should accept Filters-R-Us's offer. JUSTIFY any assumptions that you have to make. EXPLAIN your decision, and DISCUSS what, if any, risks are associated with your decision.