Kuhn Bicycle Company has been manufactring its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per uniit to make the bicycle seats are $8.00 and $9.00, respectively. Normal prodction is 50,000 bicycles per year. A supplier offers to make ths bicycle seats at a price of $21 each. If the bicycles company accepts this offer, all variable manufacturing costs will be elimated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. 1. Prepare the incremental analysis for the decision to make or buy the bicycle seats. 2. Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer?

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11 June, 06:53

Kuhn Bicycle Company has been manufactring its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per uniit to make the bicycle seats are $8.00 and $9.00, respectively. Normal prodction is 50,000 bicycles per year. A supplier offers to make ths bicycle seats at a price of $21 each. If the bicycles company accepts this offer, all variable manufacturing costs will be elimated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. 1. Prepare the incremental analysis for the decision to make or buy the bicycle seats. 2. Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer?

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Answers (1)

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Luna · Answer 1

It is cheaper to buy the seats.

Explanation:

Giving the following information:

The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year. A supplier offers to make the bicycle seats for $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.

Make in house = [8 + 9 + (9*0.6) ]*50,000 = $1,120,000

Buy = 21*50,000 = $1,050,000

It is cheaper to buy the seats.