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Calculate the total relevant cost

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Stuart Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Stuart produces and sells only 6,800 bikes each year. Due to the low volume of activity, Stuart is unable to obtain the economies of scale that larger producers achieve.

For example, Stuart could buy the handlebars for $30 each; they cost $33 each to make. The following is a detailed breakdown of current production costs:

Item                                 Unit Cost                  Total
Unit-level costs
Materials                            $16                      $108,800
Labor                                 10                         68,000
Overhead                               2                          13,600
Allocated facility-level
                                          5                            34,000
costs

Total                               $33                               $224,400

  • After seeing these figures, Stuart's president remarked that it would be foolish for the company to continue to produce the handlebars at $33 each when it can buy them for $30 each.

Required

Question 1: Calculate the total relevant cost. Do you agree with the president's conclusion?

Reference no: EM132466042

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