CVP Analysis Babbott Bicycle Company (BBC) is a high-end manufacturer of bicycles. Its products are sold in specialty retail bike stores throughout the United States and Canada. This year’s expected production is 10,000 units, but demand in the bicycle market has fluctuated in recent years so that BBC is also predicting that the actual production/sales figure could be anywhere between 7,000 and 15,000 bikes. To control quality, BBC currently makes most of the parts for its bikes, including the rear brake. BBC’s accountant reports the following costs for making the 10,000 rear brake assemblies:
| Per-Unit Costs | Costs for 10,000 Units |
Direct materials | $10.00 | $100,000 |
Direct manufacturing labor | 6.00 | 60,000 |
Variable manufacturing overhead (power and utilities) | 3.00 | 30,000 |
Inspection, setup, materials handling | 2.00 | 20,000 |
Machine lease | 3.40 | $34,000 |
Allocated fixed plant administration, taxes, and insurance | 6.00 | 60,000 |
Total costs |
| $304,000 |
An outside vendor has offered to supply up to 20,000 brake assemblies to BBC for $25 each. The following additional information is available:
• BBC’s machine lease costs are for the equipment used to make the brakes. If BBC buys all brakes from the outside vendor, it will be able to cancel the lease and avoid this cost. All other fixed costs will not be affected.
Required Assume that if BBC purchases the brake assemblies from the outside supplier, the facility where it currently makes them will remain idle for at least the next year. At that point, BBC might consider leasing the space or using it for an alternative use. Should BBC accept the outside supplier’s offer? Support your answer using CVP analysis. Include an assessment of the strategic issues facing BBC that might affect your answer.
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