Collier

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:

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

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

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