Question

Q. Bassett Inc., manufactures road racing bicycles. The company has always produced all of the necessary parts for its bikes, including all of the pedals.

An outside supplier has offered to sell one type of pedal to Bassett Inc., for a cost of $30 per unit.

To evaluate this offer, Bassett Inc., has gathered the following information relating to its own cost of producing the pedal internally:

	Per Unit				19,000 Units Per Year
Direct materials	$	12		$	228,000
Direct labor		10			190,000
Variable manufacturing overhead		3			57,000
Fixed manufacturing overhead, traceable		3	*		57,000
Fixed manufacturing overhead, allocated		6			114,000
Total cost	$	34		$	646,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being used to produce the pedals, what would be the financial advantage (disadvantage) of buying 19,000 pedals from the outside supplier?

2. Should the outside supplier’s offer be accepted?

3. Suppose that if the pedals were purchased, Bassett Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $190,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 19,000 pedals from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Answer 1