Franklin Bicycle Manufacturing Company currently produces the handlebars used in

Question

Franklin Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Franklin produces and sells only 7700 bikes each year. Due to the low volume of activity, Franklin is unable to obtain the economies of scale that larger producers achieve. For example, Franklin could buy the handlebars for $34 each: they cost $37 each to make. The following is a detailed breakdown of current production costs: Unit-level costs Materials Labor overhead $13 $100,100 84.700 23,100 Allocated facility-level costs 1077,000 $284,900 Total $37 After seeing these figures, Franklin's president remarked that it would be foolish for the company to continue to produce the handlebars at $37 each when it can buy them for $34 each. Required Calculate the total relevant cost. Do you agree with the president's conclusion? Per UnitTotal Total relevant cost Do you agree with the president's conclusion?

Explanation / Answer

Total Relevant cost per unit= Material + labor + overhead cost

= 13 + 11 + 3 = 27 per unit

Total cost = 100100 + 84700 + 23100

= 207900

Allocated facility- level costs are irrelevant in decision making , it will continue to be incurr whether we continue to produce the handle bars or buy them at $34 from outside. it does not effect on the cost for decision making. therefore it is better to produce instead of buying from outside.

Per Unit Total Total Relevant cost 27 207900 Do You agree with the presidents' conclusion ? No

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