Question

Vernon Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Vernon produces and sells only 6,100 bikes each year. Due to the low volume of activity, Vernon is unable to obtain the economies of scale that larger producers achieve. For example, Vernon could buy the handlebars for $35 each; they cost $38 each to make. The following is a detailed breakdown of current production costs:

Item	Unit Cost					Total
Unit-level costs
Materials		$	14			$	85,400
Labor			10				61,000
Overhead			3				18,300
Allocated facility-level costs			11				67,100
Total		$	38			$	231,800

After seeing these figures, Vernon’s president remarked that it would be foolish for the company to continue to produce the handlebars at $38 each when it can buy them for $35 each.

Required

Calculate the total relevant cost. Do you agree with the president’s conclusion?

Answer 1

Calculate total relevant cost

	Make	Buy
Direct material	85400
Direct labor	61000
Variable overhead	18300
Purchase cost (6100*35)		213500
Total relevant cost	164700	213500

No, President's conclusion is not right so company should make the handlebars