Flounder Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $10 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 $3

Direct labor $4

Variable manufacturing overhead $1

The company's fixed expenses would increase by $28,250 per year if managers decided to make the tire. Calculate total relevant cost to make or buy if the company needs 5,810 tires a year.

Question

Business

Puck

6 February, 16:34

Flounder Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $10 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 $3

Direct labor $4

Variable manufacturing overhead $1

The company's fixed expenses would increase by $28,250 per year if managers decided to make the tire. Calculate total relevant cost to make or buy if the company needs 5,810 tires a year.

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Answers (1)

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Gabrielle Monroe · Answer 1

Flounder should buy.

Relevant cost of making $ 74,730

Relevant of buying $58,100

Explanation:

Relevant cost are future incremental cash cost that arise as a direct consequence of a decision.

The relevant costs of making the tires internally are

$

Variable cost of making

(3+4+1) * 5,810 46,480

Incremental fixed cost = 28,250

Total relevant cost 74,730

Relevant cost of buying

External cost * units = 10 * 5,810 = $58,100

Flounder Rides should buy as this will save it $16630 i. e (74,730 - 58100)