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8 September, 22:16

Flounder Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $10 each but is currently considering making the tires in its own factory. The estimated costs per unit of making the tires are as follows:

Direct materials $3

Direct labor $4

Variable manufacturing overhead $1

The company's fixed expenses would increase by $28,250 per year if managers decided to make the tire. Calculate total relevant cost to make or buy if the company needs 5,810 tires a year.

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  1. 8 September, 23:35
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    Flounder should buy.

    Relevant cost of making $ 74,730

    Relevant of buying $58,100

    Explanation:

    Relevant cost are future incremental cash cost that arise as a direct consequence of a decision.

    The relevant costs of making the tires internally are

    $

    Variable cost of making

    (3+4+1) * 5,810 46,480

    Incremental fixed cost = 28,250

    Total relevant cost 74,730

    Relevant cost of buying

    External cost * units = 10 * 5,810 = $58,100

    Flounder Rides should buy as this will save it $16630 i. e (74,730 - 58100)
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