Kuhn Bicycle Company Has Been Manufacturing Its Own Seats for Its

question 182

Essay

Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year.
A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.
Instructions
(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.
(b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.

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Definitions:

Job Attitudes

Psychological tendencies expressed by evaluating one's job with some degree of favor or disfavor, encompassing aspects like job satisfaction and organizational commitment.

Compensation Attitudes

Refers to the beliefs and feelings employees have about their pay and how it motivates them.

Return On Equity

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Compensation Objectives

Goals that an organization's pay system aims to achieve, such as attracting and retaining employees, rewarding performance, and ensuring equity.