Question

You are a financial manager for Zoom Corp., which manufactures bicycles. In the most recent fiscal year,
Zoom manufactured and sold 20,000 bicycles. Wheels, seats, and brake calipers are three components of
the bicycles currently manufactured by Zoom. Three different vendors have proposed to provide those
components to Zoom, and quoted prices (including shipping) for their delivery. Your task is to determine
which, if any, of these proposals should be accepted.
Prepare a make vs. buy incremental analysis for each possible course of action in an Excel worksheet. Your
grade will be based on the correctness of your answers, as well as the use of Excel. That is, where possible,
you should use formulas to get your answers, rather than keyed-in values. See your instructor for help with
Excel basics if you need it.
In a Word document, prepare a memo stating which of the proposals you suggest accepting, as well as the
basis for your conclusions. Also identify any nonfinancial factors you should consider before accepting any
of the outsourcing proposals.
Attach both files to the Canvas assignment space by the due date of November 6th
Below is cost data for Zoom's production of wheels, seats, and calipers. Outside suppliers have offered to
provide wheels for $6.96, seats for $9.38, and calipers for $2.14 per piece. Both wheels and seats are branded
with the Zoom logo, and that logo will need to be added at the Zoom factory at a cost of $0.50 each for any
of these components that are outsourced. For all three components, 75% of the fixed costs are avoidable, and
will be eliminated if the component's production is outsourced. In addition, seats and calipers are both
produced out of the same small factory space. If both seats and calipers were outsourced, Zoom could lease
the space out and increase net income by $6,000 per year, while eliminating all fixed costs for the two
components.
		Wheels	Seats	Calipers
	Cost category
	Direct materials	$137,500	$54,000	$90,500
	Direct labor	97,500	72,000	41,500
	Variable overhead	21,000	14,000	16,000
	Fixed overhead	60,400	36,000	30,800
	Total cost	$316,400	$176,000	$178,800
	Units produced	40,000	20,000	80,000
	Cost per unit	$7.91	$8.80	$2.24
Hints: Prepare incremental analyses for each component separately. Make wheels vs. buy wheels, etc. Since
there are additional implications to outsourcing both seats and calipers, do a make vs. buy analysis assuming
both are outsourced. A correct solution, then, will likely have at least four incremental analyses.

Answer 1

1. Make wheels v. Buy Wheels :

	Make Wheels	Buy Wheels	Increase ( decrease) in NOI
Avoidable Costs
Direct Materials	0	$ 137,500	$ 137,500
Direct Labor	0	97,500	97,500
Variable Overhead	0	21,000	21,000
Fixed Overheads	0	45,300	45,300
Logo Costs	0	(20,000)	(20,000)
Outsourcing Cost	0	(278,400)	(278,400)
	$ 0	$ 2,900	$ 2,900

2. Make seats V. Buy seats :

	Make Seats	Buy Seats	Increase ( decrease) in NOI
Avoidable Costs
Direct Materials	$ 0	$ 54,000	$ 54,000
Direct Labor	0	72,000	72,000
Variable Overhead	0	14,000	14,000
Fixed Overheads	0	27,000	27,000
Logo Costs	0	(10,000)	(10,000)
Outsourcing Cost	0	(187,600)	(187,600)
Totals	$ 0	$ ( 30,600)	$ ( 30,600)

3.Make Calipers v Buy Calipers:

	Make Calipers	Buy Calipers	Increase ( decrease) of NOI
Avoidable Costs
Direct Materials	$ 0	$ 90,500	$ 90,500
Direct Labor	0	41,500	41,500
Variable Overhead	0	16,000	16,000
Fixed Overheads	0	23,100	23,100
Logo Costs	0	(40,000)	(40,000)
Outsourcing Cost	0	(171,200)	(171,200)
Totals	$ 0	$ ( 40,100)	$ (40,100)

4.Make seats and calipers v. Buy seats and calipers.:

	Make Seats and Calipers	Buy Seats and Calipers	Increase ( decrease) in NOI
Avoidable Costs
Direct Materials	$ 0	$ 144,500	$ 144,500
Direct Labor	0	113,500	113,500
Variable Overhead	0	30,000	30,000
Fixed Overheads	0	66,800	66,800
Logo Costs	0	(50,000)	(50,000)
Outsourcing Costs	0	(358,800)	(358,800)
Opportunity Costs	( 6,000)	0	6,000
Totals	$ ( 6,000)	$ (54,000)	(48,000)