Paramount Bikes, Inc., uses 10,000 derailleurs in its bicycles each year. Derail
ID: 2367691 • Letter: P
Question
Paramount Bikes, Inc., uses 10,000 derailleurs in its bicycles each year. Derailleurs currently cost the company $20.90 per unit to manufacture, determined as follows:
Paramount Bikes, Inc., uses 10,000 derailleurs in its bicycles each year. Derailleurs currently cost the company $20.90 per unit to manufacture, determined as follows: Paramount Bikes, Inc., has been approached by an outside supplier that will provide derailleurs at a price of $16 per unit. If Paramount Bikes, Inc., stops producing derailleurs, the direct materials, direct labor, and variable manufacturing overhead will be eliminated, as will $30,000 of the fixed manufacturing overhead. Use incremental analysis to determine whether Paramount Bikes, Inc., should make or buy derailleurs. Prepare a schedule, and indicate your decision to continue making, or to buy the part:
Explanation / Answer
given total variable over head,direct materials and direct labor would be eliminated. and $30000 of fixed overhead. Hence,(50600 + 55000 + 37400) / 10000 = 143000 / 10000 = $14.3 Hence Incremental analysis Total savings on buying 10000 derailleurs = $143000 + $30000 = $173000 Total costs on buying 10000 derailleurs = $16 x 10000 = $160000 Incremental benefit = $173000 - $160000 = $13000
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