Le Giro Bicycles Has Been Manufacturing Its Own Wheels for Its

Essay

Le Giro 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 $75 and $25,respectively.Normal production is 200 000 wheels per year.
A supplier offers to make the wheels at a price of $108 each.If the bicycle company accepts this offer,all variable manufacturing costs will be eliminated,but the $420 000 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 Le Giro Bicycles buy the wheels from the outside supplier? Justify your answer.
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