Jordan Bicycle Manufacturing Company currently produces the handlebars used in m
ID: 2580714 • Letter: J
Question
Jordan Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Jordan produces and sells only 10,000 bikes each year. Due to the low volume of activity, Jordan is unable to obtain the economies of scale that larger producers achieve. For example, Jordan could buy the handlebars for $29 each, they cost $31 each to make. The following is a detailed breakdown of current production costs Unit Cost Total tem Unit-level costs Materials Labor Overhead 10 4 $31 $15 S 150,000 100,000 20,000 40,000 Allocated facility-level costs Total 310,000 After seeing these figures, Jordan's president remarked that it would be foolish for the company to continue to produce the handlebars at $31 each when it can buy them for $29 each Required Calculate the total relevant cost. Per Unit Total Total relevant cost Do you agree with the president's conclusion? Yes O NoExplanation / Answer
Relevant cost analysis is used when to take decision for making a product or buying from outside
Relevant cost basically analyses the variable cost and fixed cost for manufacturing a product. The fixed cost is incurred irrespective of any manufacturing is done or not
The following assumptions are taken
· The company is manufacturing at its maximum capacity
· The quality of handlebars purchased from outside is same as manufactured internally
The relevant costs are variable cost as calculated below
Relevant cost
Per unit cost
Total units
Total cost
Direct material
$15
10,000
$150,000
Direct labor
$10
10,000
$100,000
Direct overhead
$2
10,000
$ 20,000
Total relevant cost
$27
$270,000
The total relevant cost per unit is $ 27 and purchase cost is $ 29, hence it is advisable to manufacture internally
We do not agree to president conclusion to purchase from outside but manufacture internally
Relevant cost
Per unit cost
Total units
Total cost
Direct material
$15
10,000
$150,000
Direct labor
$10
10,000
$100,000
Direct overhead
$2
10,000
$ 20,000
Total relevant cost
$27
$270,000
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