Question

Exercise 8-9 Bridgeport Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $12 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 Direct labor Variable manufacturing overhead $1 $3 $4 The company's fixed expenses would increase by $28,630 per year if managers decided to make the tire (a1) Calculate total relevant cost to make or buy if the company needs 5,100 tires a year Make Buy Total relevant cost $ (a2) Ignoring qualitative factors, if the company needs 5,100 tires a year, should it continue to purchase them from Balyo or begin to produce them internally? The compan to purchase the tires. should continue should not continue

Answer 1

Total relevent cost to make 5,100 tires = [ ( $3 + $4 + $1 ) * 5,100 tires ] + $28,630 = $40,800 + $28,630 = $69,430

Total relevant cost of buying 5,100 tires = 5,100 tires * $12 = $61,200

(a1)

	Make	Buy
Total relevant cost	$69,430	$61,200

(a2) Ignoring qualitative factors, if the company needs 5,100 tires a year, should it continue to purchase them from Balyo or begin to produce them internally?

Ans : The company should continue to purchase the tires.

Reason : Company should continue purchasing the tires, as producing the tires internally would increase the cost by $8,230 ( $69,430 - $61,200 )