Traditions Home Accessories Company manufactures pillows using an activity-based costing system to allocate all manufacturing conversion costs. The following information is provided for the month of June:
| Activity | Estimated Indirect Activity Costs | Allocation Base | Estimated Quantity of Allocation Base |
| Materials handling | $3,000 | Number of parts | 6,000 parts |
| Assembling | $7,200 | Number of parts | 6,000 parts |
| Packaging | $4,000 | Number of pillows | 2,000 pillows |
Each pillow consists of 3 parts; the total direct materials cost per pillow is $8.00.
If the cost to purchase the same pillow from a supplier is $17.00, what should Traditions Home Accessories do to maximize profits?
◦ Purchase the pillow from the supplier.
◦ Continue to manufacture the pillow.
◦ Close down the business.
◦ Since the cost to manufacture the pillow is also $17.00, the company would make the same profit whether it bought the pillow or manufactured it.
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