Le Giro Bicycles Has Been Manufacturing Its Own Wheels for Its

question 125

Essay

Le Giro 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 labour cost.The direct materials and direct labour cost per unit to make the wheels are $75 and $25,respectively.Normal production is 200 000 wheels per year.
A supplier offers to make the wheels at a price of $108 each.If the bicycle company accepts this offer,all variable manufacturing costs will be eliminated,but the $420 000 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 Le Giro Bicycles buy the wheels from the outside supplier? Justify your answer.
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Definitions:

Economic Growth

Refers to the increase in the production of economic goods and services, from one period to another, often measured by GDP (Gross Domestic Product).

Technological Advance

The development of new technologies or the improvement of existing technologies to enhance productivity, efficiency, or quality in goods and services.

Opportunity Cost

The economic impact of rejecting the following preferable option when deciding.

Positive Statements

Claims that attempt to describe the world as it is.