Incremental Analysis-Make-Or-Buy Decision
Paramount Bikes, Inc Paramount Bikes, Inc

question 40

Essay

Incremental analysis-make-or-buy decision
Paramount Bikes, Inc., uses 10,000 derailleurs in its bicycles each year. Derailleurs currently cost the company $20.90 per unit to manufacture, determined as follows:
$$\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 50,600 \\\hline \text { Direct labor } & 55,000 \\\hline \text { Variable manufacturing overhead } & 37,400 \\\hline \text { Fixed manufacturing overhead } & \underline { 66,000 } \\\hline \text { Total costs } & \$ 209,000 \\\hline \text { Cost per unit } ( \$ 209,000 / 10,000 \text { units } ) & \$ 20.90 \\\hline\end{array}$$
Paramount Bikes, Inc., has been approached by an outside supplier that will provide derailleurs at a price of $16 per unit. If Paramount Bikes, Inc., stops producing derailleurs, the direct materials, direct labor, and variable manufacturing overhead will be eliminated, as will $30,000 of the fixed manufacturing overhead. Use incremental analysis to determine whether Paramount Bikes, Inc., should make or buy derailleurs. Complete the following schedule, and indicate in the space provided your decision to continue making, or to buy the part:

Decision: ___________________________________________

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