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 $7.26, seats for $7.76, and calipers for $2.56 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

$90,500

Direct labor

97,000

71,500

41,500

Variable overhead

21,000

14,000

16,000

Fixed overhead

58,600

36,600

31,400

Total cost

$314,600

$176,600

$179,400

Units produced

40,000

20,000

80,000

Cost per unit

$7.87

$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

Preparing a make vs. buy analysis for each possible course of action

Particulars	Wheels	Seats	Calipers	Bicycle
Units produced	40,000	20,000	80,000	20,000
Calculating Variable cost per unit for each component
Cost category	Wheels	Seats	Calipers	Total
Direct materials	138000	54500	90500	283000
Direct labor	97,000	71,500	41,500	210000
Variable overhead	21,000	14,000	16,000	51000
Total Variable cost	256000	140000	148000	544000
Variable Cost per unit	6.40	7.00	1.85	27.20

Calculating Cost of each components (Absorption or Full cost Method)
Cost category	Wheels	Seats	Calipers	Total
Total Variable Cost (above)	2,56,000	1,40,000	1,48,000	544000
Fixed overhead	58,600	36,600	31,400	126600
Total cost	314600	176600	179400	670600
Cost per unit (based on Absorption costing)	7.87	8.83	2.24	33.53

Buying components from outside (assessing each component separately)

Cost category	Wheels	Seats	Calipers
Buy from Outside	7.26	7.76	2.56
Cost of Zoom Logo	0.5	0.5	0
Net cost of Buying from outside (a)	7.76	8.26	2.56
Units produced (b)	40,000	20,000	80,000
Total variable Cost (a x b)	310400	165200	204800
Relevant fixed cost (25% Fixed cost)	14650	9150	7850
Total cost ( Buy from Outside)	3,25,050	1,74,350	2,12,650
Total Cost Per unit ( Buy from Outside)	8.13	8.72	2.66
Comparing cost per unit of each component
Cost category	Wheels	Seats	Calipers
Absorption costing method	7.87	8.83	2.24
Outside purchase cost	8.13	8.72	2.66
Incremental saving(cost) buying from outside(per unit)	-0.26	0.11	-0.42
Units	40,000	20,000	80,000
Incremental saving(cost) buying from outside	-10,450	2,250	-33,250
Decision	Make	Buy	Make

Decision on make or buy is based on total relevant cost Wheels and Calipers should be made and seats should be brought from outside supplier @$7.76/seats.

Analysis various options
Cost category	Wheels	Seats	Calipers	Total
Option 1.) Make All components
	Make	Make	Make
Total cost (absorption costing)	314600	176600	179400	670600
Option 2.) Make Wheels and calipers but Buy Seats
	Make	Buy	Make
Total cost ( Buy from Outside)	314600	1,74,350	1,79,400	6,68,350
Option 3.) Make Wheels but Buy Seats and calipers
Cost category	Wheels	Seats	Calipers	Total
	Make	Buy	Buy
Total variable Cost or Buying cost from outside)	2,56,000	165200	204800	626000
Relevant fixed cost	58,600	0	0	58,600
Total cost	3,14,600	1,65,200	2,04,800	6,84,600
Less:- Lease income				-6000
Net Total cost				6,78,600
Option 4.) Buy each component from outside
Cost category	Wheels	Seats	Calipers	Total
	Buy	Buy	Buy
Total variable Cost or Buying cost from outside)	3,10,400	1,65,200	2,04,800	6,80,400
Relevant fixed cost	14,650	0	0	14,650
Sub Total	3,25,050	1,65,200	2,04,800	6,95,050
Less:- Lease income				-6000
Net Total cost				6,89,050

Non financial factors to be considered before accepting outsourcing proposal are as follow

Quality of the product should not be compromised,

Relationship with customers and suppliers should not get affected,

effects of unemployment of labour should be considered,etc