Question

Franklin Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Franklin produces and sells only 7,000 bikes each year. Due to the low volume of activity, Franklin is unable to obtain the economies of scale that larger producers achieve. For example, Franklin could buy the handlebars for $34 each; they cost $37 each to make. The following is a detailed breakdown of current production costs: Item Unit Cost Total Unit-level costs Materials $ 16 $ 112,000 Labor 10 70,000 Overhead 2 14,000 Allocated facility-level costs 9 63,000 Total $ 37 $ 259,000 After seeing these figures, Franklin’s president remarked that it would be foolish for the company to continue to produce the handlebars at $37 each when it can buy them for $34 each. Required Calculate the total relevant cost. Do you agree with the president’s conclusion?

Answer 1

1
	Per unit	Total
Materials	16	112000
Labor	10	70000
Overhead	2	14000
Total relevant cost	28	196000
2
No, the president’s conclusion is wrong.
The relevant cost per unit is $28, so it is beneficial to make