Question

You are a financial manager for Zoom Corp., which manufactures bicycles. In the most recent fiscal year,                      
Zoom manufactured and sold 20,000 bicycles. Wheels, seats, and brake calipers are three components of                      
the bicycles currently manufactured by Zoom. Three different vendors have proposed to provide those                       
components to Zoom, and quoted prices (including shipping) for their delivery. Your task is to determine                      
which, if any, of these proposals should be accepted.                      

Prepare a make vs. buy incremental analysis for each possible course of action in an Excel worksheet. Your                      
grade will be based on the correctness of your answers, as well as the use of Excel. That is, where possible,                       
you should use formulas to get your answers, rather than keyed-in values. See your instructor for help with                       
Excel basics if you need it.                      

In a Word document, prepare a memo stating which of the proposals you suggest accepting, as well as the                      
basis for your conclusions. Also identify any nonfinancial factors you should consider before accepting any                      
of the outsourcing proposals.          

Below is cost data for Zoom's production of wheels, seats, and calipers. Outside suppliers have offered to                      
provide wheels for $6.90, seats for $9.39, and calipers for $2.14 per piece. Both wheels and seats are branded                      
with the Zoom logo, and that logo will need to be added at the Zoom factory at a cost of $0.50 each for any                      
of these components that are outsourced. For all three components, 75% of the fixed costs are avoidable, and                       
will be eliminated if the component's production is outsourced. In addition, seats and calipers are both                       
produced out of the same small factory space. If both seats and calipers were outsourced, Zoom could lease                      
the space out and increase net income by $6,000 per year, while eliminating all fixed costs for the two                      
components.                      
           

	Wheels	Seats	Calipers
Cost category
Direct materials	$138,000	$54,500	$87,500
Direct labor	97,000	71,500	44,500
Variable overhead	21,000	14,000	16,000
Fixed overhead	60,400	36,600	31,400
Total cost	$316,400	$176,600	$179,400
Units produced	40,000	20,000	80,000
Cost per unit	$7.91	$8.83	$2.24

Hints: Prepare incremental analyses for each component separately. Make wheels vs. buy wheels, etc. Since                      
there are additional implications to outsourcing both seats and calipers, do a make vs. buy analysis assuming                      
both are outsourced. A correct solution, then, will likely have at least four incremental analyses.                      

Answer 1

Answer is given below