Reference no: EM133155055

Question - Pedex Company manufactures 4,000 bicycles a year. The following is the data concerning the unit production costs of the seats for the bicycles at its current level of production:

Direct Materials $46

Direct Labour $46

Variable Manufacturing Overhead $12

Fixed Manufacturing Overhead $64

Total Manufacturing Cost per Unit $168

An outside supplier has offered to sell Pedex all of the seats it requires. If Pedex decides to discontinue making the seats, 80% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a variable cost.

Required -

1. Assume Pedex Company has no alternative use for the facilities presently devoted to production of the seats. Without considering opportunity costs, how much are the relevant costs of making the part instead of buying it from outside.

2. Assume that Pedex Company could use the facilities presently devoted to production of the seats to expand production of another product that would yield an additional contribution margin of $160,000 annually. What is the maximum price Pedex Company should be willing to pay the outside supplier for bicycle seats?