Accounting Question! Please help!?
Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year.
A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.Instructions(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.(b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.
- jacob sLv 72 months ago
Step1 total in-house production cost
=direct material +direct labour+variable manufacturing over head+ fixed overheads
Step2 buying from outside cost
=purchase cost+fixed overheads
The cost of buying from outside is less than cost of producing in-house by 70000, so buying from outside is the preferable option