Reference no: EM132924430

Question - Clean Air is a manufacturer of dust collection systems for home workshops. Each of the systems requires a filter bag to trap sawdust and shavings from woodworking equipment. Clean Air manufactures the filter bags which are sold through hardware stores and also used in the manufacture of the company's dust collection systems. The Dust Collection System Department currently needs 250,000 filters to meet it manufacturing needs for the period. The filters can be purchased from an outside supplier for $15.00 per unit. The Filter manufacturing Department records reveal the following information.

 Market selling price of filters $22.00

Variable manufacturing costs per filter $12.00

Variable marketing and administrative costs per filter $3.00

Fixed manufacturing costs $2,000,000

Fixed marketing and administrative costs $1,250,000

Capacity 3,000,000 filters

Current sales volume 2,500,000 filters

The CEO was thinking that if the Filter Manufacturing Department could supply the filters at a lower price than the Dust Collection System Department is currently paying to outside suppliers, then they would arrange an internal transfer between departments rather than giving the business to an external company. If the internal transfer is arranged the variable marketing and administrative costs for the transferred filters can be avoided.

Required - Make an analysis that demonstrates if the Filter Manufacturing Department should supply the filters to the Dust Collection System Department.