Incremental Analysis - Make-Or-Buy Decision

question 6

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: 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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Definitions:

Cash Dividends

A portion of a company's earnings that is paid out to shareholders, typically in the form of cash.

Indirect Method

A approach used in cash flow statements to adjust net income for changes in non-cash accounts to determine net cash from operating activities.

Operating Activities

Operating activities include the primary revenue-generating activities of an organization as reflected in its cash flow.

Inventory Account

An account representing the total cost of all unsold goods held by a company, including raw materials, work-in-progress, and finished goods.