Steele Bicycle Manufacturing Company currently produces the handlebars used in m

Question

Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtain the economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each to make. The following is a detailed breakdown of current production costs Item Unit-level costs Unit Cost Total Materials Labor Overhead $ 16 12 $160,000 120,000 20,000 40,000 $340,000 Allocated facility-level costs Total $34 After seeing these figures, Steele's president remarked that it would be foolish for the company to continue to produce the handlebars at $34 each when it can buy them for $31 each. Required Calculate the total relevant cost. Do you agree with the president's conclusion? Per unit To Total relevant cost Do you agree with the president's conclusion? No

Explanation / Answer

1) Per unit Total Total relevant costs $30 300000 (16+12+2) (160000+120000+20000) Do you agree with the president's conclusion ? No Note: Allocated facility - level costs cannot be avoided even if company buys handlebars from outside. Hence it is irrelevant. 2) a Total relevant cost (7500+8250+5250+(13500*1/3)) 25500 Should Omron continue to make the containers ? Yes Because it is less than the cost of purchase from outside (ie 10000*$3 = $30000) b Total avoidable cost (7500+8250+5250+(13500*1/3)+8000) 33500 Should Omron continue to make the containers ? No Because it is more than the cost of purchase from outside

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