Incremental Analysis - Make-Or-Buy Decision

question 41

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:

Differential Carrier

The housing that encloses the differential assembly in a vehicle, supporting the gears that allow the wheels to rotate at different speeds.

Backlash

The play or slop between mating mechanical parts, such as gears, which is the result of gaps between parts.

Meshing Gears

The process where the teeth of two or more gears come into contact with each other in order to transmit power from one shaft to another.

Sliding Action

The movement or operation of a mechanism that involves two or more surfaces moving over each other with minimal resistance.