Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtain the economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each to make.
The following is a detailed breakdown of current production costs:
Item Unit Cost Total
Unit-level costs
Materials $16 $160,000
Labor 12 120,000
Overhead 2 20,000
Allocated facility-level costs 4 40,000
Total $34 $340,000
After seeing these figures, Steele's president remarked that it would be foolish for the company to continue to produce the handlebars at $34 each when it can buy them for $31 each.
Calculate the total relevant cost. Do you agree with the president's conclusion?
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