\"The Ace Bicycle Company expects to produce 9,100 bicycles this year. Currently

ID: 2562829 • Letter: #

Question

"The Ace Bicycle Company expects to produce 9,100 bicycles this year. Currently Ace also makes the chains for its bicycles. Ace's accountant reports the following costs for making 9,100 chains. Direct materials are $3.41 per chain. Direct manufacturing cost is $1.70 per chain. Variable manufacturing overhead (power and utilities) is $0.70 per chain. Inspection, setup, and material costs are $2,300. Leasing the machine for the chains is $3,300. Administration for the facility, including taxes and insurance is $55,000. Ace has received an offer from an outside vendor to supply chains for $10.82 per chain. The costs for the machine lease are the payments Ace makes for renting the equipment used in making the chains. If Ace buys all of its chains from the outside vendor, it does not need this machine. Ace will not need to pay the variable costs or the inspection and setup costs if it purchases chains from the outside vendor. Assume that if the chains are purchased from the outside supplier, the facility where the chains are currently made will be used to upgrade the bicycles by adding mud flaps and reflector bars. As a consequence, the selling price for the bicycles will increase by $30. The variable cost per unit of the upgrade would be $18.12, and an additional fixed cost of $17,900 would be incurred. Should Ace make or buy the chains, assuming that 9,100 units are produced (and sold)? Enter the cost ($) of the preferred option. When calculating the cost of the upgrade option, please subtract the additional revenue gained from selling the upgrade."

Explanation / Answer

Answer

Direct materials per unit

3.41

Direct manufacturing Costs per unit

1.7

Variable manufacturing overhead per unit

0.7

Total variable cost per unit

$ 5.81

Total no. of chains

9100

Total Variable costs [5.81 x 9100 units]

52871

Inspection

2300

Leasing

3300

Taxes Insurance

55000

Total Cost of Option 1 [52871+2300+3300+55000]

$ 113471

Purchase cost

[9100 x 10.82]

98462

Taxes and Insurance

[Fixed and unavoidable]

55000

Total Option's Cost

[98462 + 55000]

153462

Less: Additional revenue for 9100 bicycles

Sales

273000

Variable cost of upgrade

-164892

Contribution

108108

Additional Fixed Cost

-17900

Additional Income

90208

Net Total Cost of Second Option [153462 – 90208]

$ 63254