Prepare an incremental analysis for the decision

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Question - Collier Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $1.50 and $1.80, respectively. Normal production is 200,000 wheels per year.

A supplier offers to make the wheels at a price of $4 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $42,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.

Required:

Prepare an incremental analysis for the decision to make or buy the wheels.

Should Collier Bicycles buy the wheels from the outside supplier? Justify your answer.

Reference no: EM131772955

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