Exercises: 13 8
Roaming Bicycle
Manufacturing Company currently produces the handlebars used in manufacturing
its bicycles, which are high quality racing bikes with limited sales. Roaming produces
and sells only 6,000 bikes each year. Due to the low volume of activity,
Roaming is unable to obtain the economies of scale that larger producers
achieve. For example, Roaming could buy the handlebars for $35 each; they cost
$38 each to make. The following is a detailed breakdown of current production
costs.
Item Unit Cost Total Unit level
costs
Materials $ 18
108,000
Labor 12
72,000
Overhead 3
18,000
Allocated facility level
costs 5 Total $ 38
$ 228,000
After seeing the
figures, Roaming’s president remarked that it would be foolish for the company
to continue to produce the handlebars at $38 each when it can buy them for $35
each
Do you agree with the president’s conclusion?
Support your answers with appropriate computations.