2. Bolder Bikes, Inc. manufacturers mountain bike frames in Boulder Colorado. In
ID: 2384938 • Letter: 2
Question
2. Bolder Bikes, Inc. manufacturers mountain bike frames in Boulder Colorado. In 2012, they produced 24,000 frames at a total cost of $1,296,000. Frames Unlimited, Inc. has offered to supply as many frames as Boulder Bikes wants at a cost of $49.50. Boulder Bikes anticipates needing 26,000 frames each year over the next few years. Boulder Bikes uses historical cost data to come up with the following regression equation with total manufacturing costs of the frame as the dependent variable and frames produced as the independent variable:y=$545,000 + 21X
During the years used to estimate the regression equation, the production of frames varied from 22,000 to 26,000.
a. Using this equation, estimate how much it would cost Boulder Bikes to manufacture the 26,000 frames.
b. How much more or less costly is it to manufacture the frames rather than to acquire them from Frames Unlimited?
Explanation / Answer
a. y=$545,000 + 21X We jave X=26000. So y = 545,000 + 21*26000 = $1,091,000 .....Ans (a) b. We have y = $1,296,000 & X=24,000 By putting value of X, we get y = 545,000+24000*21 = $1,049,000 So we see that the historical data is no longer valid. We now try to find teh Var cost per frame bu tweaking the above eqn & assuming that Fixed costs of $545,000 haven't changed but Var costs (V) have changed. So we get y=545,000+24000*V = 1296,000 Solving for V, we get V = (1296000-545,000)/24000 = $31 per frame So Mfg cost for Frame is $31...up from earlier $21 But acuiring cost of frame is $49.50 which is 49.50-31 = 18.50 more than own mfgd frame. So it is advisable to coninue mfg own frames
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