Danford Company, a manufacturer of farm equipment, currently produces 20,000 units of gas filters per year for use in its lawn-mower production. The costs, based on the previous year’s production, are reported in Table P6.24. It is anticipated that gas-filter production will last five years. If the company continuesto produce the product in-house, annual direct material costs will increase at the rate of 5%. (For example, annual material costs during the first production

TABLE P6.24 Production costs

ItemExpense ($)Direct materials$ 60,000Direct labor180,000Variable overhead (power and water)135,000Fixed overhead (light and heat)70,000Total cost$445,000

year will be $63,000.) Direct labor will also increase at the rate of 6% per year. However, variable overhead costs will increase at the rate of 3%, but the fixed overhead will remain at its current level over the next five years. John Holland Company has offered to sell Danford 20,000 units of gas filters for $25 per unit. If Danford accepts the offer, some of the manufacturing facilities currently used to manufacture the filter could be rented to a third party for $35,000 per year. In addition, $3.5 per unit of the fixed overheard applied to the production of gas filters would be eliminated. The firm’s interest rate is known to be 15%. What is the unit cost of buying the gas filter from the outside source? Should Danford accept John Holland’s offer, and why?

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