Riverbed Rides makes bicycles. It has always purchased its bicycle tires from th
ID: 2536220 • Letter: R
Question
Riverbed Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires 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:
The company’s fixed expenses would increase by $28,190 per year if managers decided to make the tire.
(a1) Calculate total relevant cost to make or buy if the company needs 5,860 tires a year.
(a2) Ignoring qualitative factors, if the company needs 5,860 tires a year, should it continue to purchase them from Balyo or begin to produce them internally?
Explanation / Answer
Answer:
(a1) Calculate total relevant cost to make or buy if the company needs 5,860 tires a year.
Make
Buy
Direct materials
$4
Direct labor
5
Variable overhead
2
Relevant cost per unit to make
$11
Cost to buy
$11
Units needed
´ 5,860
´ 5,860
Total variable cost
$64,460
$64,460
Additional fixed costs to make
28,190
-
Total cost
$92,650
$64,460
The company should continue to purchase the tires.
_________________________________
(a2) Ignoring qualitative factors, if the company needs 5,860 tires a year, should it continue to purchase them from Balyo or begin to produce them internally?
Answer:
Company should continue to purchase them from Balyo because cost of buying is less then cost of making
Make
Buy
Direct materials
$4
Direct labor
5
Variable overhead
2
Relevant cost per unit to make
$11
Cost to buy
$11
Units needed
´ 5,860
´ 5,860
Total variable cost
$64,460
$64,460
Additional fixed costs to make
28,190
-
Total cost
$92,650
$64,460
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