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31 August, 05:33

5. Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products. Required: a. Prepare an incremental analysis for the decision to make or buy the wheels. b. Should Sarasota Bicycles buy the wheels from the outside supplier

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  1. 31 August, 07:32
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    It is better to make the wheels

    Explanation:

    Sarasota Bicycles

    Incremental Analysis

    Make Buy

    Direct materials $3.00

    Direct labor $3.60

    Variable OH (3.06*30%) 1.08

    Total 7.68 8

    Normal production 200,000 200,000

    Total Costs 1536000 1600,000

    Fixed Overheads 84,000 84,000

    Total Costs 1620,000 1684,000

    As fixed costs are irrelevant costs that would not change whether the company makes or buys wheels and the cost to make the wheels $7.08 is less than the cost to buy $ 8.0. It is better to make the wheels. Buying the wheels from the outside supplier is costly.
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