Question

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.

Answer 1

Answer:

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)