Outsourcing decision
Roaming Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Roaming produces and sells only 6,000 bikes each year. Due to the low volume of activity, Roaming is unable to obtain the economies of scale that larger producers achieve. For example, Roaming could buy the handlebars for $35 each; they cost $38 each to make. The following is a detailed breakdown of current production costs.
Item | Unit Cost | Total |
Unit-level costs |
|
|
Materials | $18 | $108,000 |
Labor | 3 | 72,000 |
Overhead | 3 | 18,000 |
Allocated facility-level costs | 5 | 30,000 |
Total | $38 | $228,000 |
After seeing these figures, Roaming’s president remarked that it would be foolish for the company to continue to produce the handlebars at $38 each when it can buy them for $35 each.
Required
Do you agree with the president’s conclusion? Support your answer with appropriate computations.
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