Sarasota Bicycles Has Been Manufacturing Its Own Wheels for Its

Essay

Sarasota Bicycles has been manufacturing its own wheels for its bikes.The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost.The direct materials and direct labour cost per unit to make the wheels are $3.00 and $3.60 respectively.Normal production is 200,000 wheels per year.A supplier offers to make the wheels at a price of $8 each.If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.Required:
a.Prepare an incremental analysis for the decision to make or buy the wheels.
b.Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.