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 7,900 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 $37 each; they cost $40 each to make. The following is a detailed breakdown of current production costs. Item Unit Cost Total Unit-level costs Materials $ 17 $ 134,300 Labor 11 86,900 Overhead 3 23,700 Allocated facility-level costs 9 71,100 Total $ 40 $ 316,000 After seeing these figures, Jordan’s president remarked that it would be foolish for the company to continue to produce the handlebars at $40 each when it can buy them for $37 each.Required:a. Calculate the total relevant cost per unit and total.

Answer 1

Answer:

relevant cost 31 per unit  for total 244,900

buy cost         40 per unit for total 316,000

differential     (9)                               (71,100)

It should continue to make the product.

Explanation:

Materials             17

Labor                   11

Fixed OVerhead  3

17+11+3 = 31 Manufacturing cost

The company is producing the handlebars at $31 and allocating $9 of the plant cost

The relevant cost for the comparisson should be $31 not $40

Threfore comparing only he relevant cost it is a better deal to mantain the habdlebars production instead of buying.