Question

Jones Company has the following data to make 10,000 seats for its bicycles: Variable Product Costs 80,000 Fixed Product Costs 10,000 The company needs 10,000 bicycle seats per year to put on the bicycles the company produces. Another option is that company can purchase the 10,000 bicycle seats from an outside source for $8.50 per seat. Assume fixed costs stay the same whether the company makes or buys the seats. Based on financial data only, should the company make or purchase the bicycle seats?

Answer 1

Answer:

The company should make the bicycle seats.

Explanation:

Given:

Number of seats to be made = 10,000

Variable cost = 80,000

Fixed cost = 10,000

Outside source cost for seats = $ 8.50 per seat

Since, the fixed cost of the seats cannot be eliminated. Therefore, the deciding factor will only be the variable cost.

Thus,

contribution margin per unit seat if made by own

= ( Variable cost / Number of seats )

Or

= 80,000 / 10,000

or

= $ 8

now,

the making the seats by own is $ 0.5 cheaper.

Hence, the company should make the bicycle seats.