Thomas Corporation makes bicycles. It has always purchased its bicycle tires fro

Question

Thomas Corporation makes bicycles. It has always purchased its bicycle tires from the Firelock Company at $11 each, but is currently considering making the tires in its own factory. The estimated costs per unit of making the tires are as follows: Direct materials $4 Direct labor $5 Variable manufacturing overhead $1 The company’s fixed expenses would increase by $28,740 per year if managers decided to make the tire. (a1) Calculate total relevant cost to make or buy if the company needs 6,500 tires a year. Make Buy Total relevant cost $ $ (a2) Ignoring qualitative factors, if the company needs 6,500 tires a year, should it continue to purchase them from Firelock or begin to produce them internally? The company to purchase the tires.

Explanation / Answer

Cost of making 6,500 tires :-

Direct materials       $26,000

Direct labor                                          $32,500

Variable manufacturing overhead        $6,500

Fixed expenses                                     $28,740

Total cost                                             $93,740

If the company buy the 6,500 tires, then cost would be $ 71,500.

Therefore, the company should continue to purchase the tires from Firelock.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.