Garvin Corporation manufactures a children’s bicycle, model CT8. Garvin currently manufactures the bicycle frame. During 2012, j a Average cost per frame Garvin made 30,000 frames at a total cost of $900,000. Ryan Corporation has offered to sup- $30 ply as many frames as Garvin wants at a cost of $28.50 per frame. Garvin anticipates needing 36,000 frames each year for the next few years.
1. a. What is the average cost of manufacturing a bicycle frame in 2012? How does it compare to Ryan’s offer?
b. Can Garvin use the answer in requirement la to determine the cost of manufacturing 36,000 bicycle frames? Explain.
2. Garvin’s cost analyst uses annual data from past years to estimate the following regression equation with total manufacturing costs of the bicycle frame as the dependent variable and bicycle frames produced as the independent variable:
y = $432,000 + $15X
During the years used to estimate the regression equation, the production of bicycle frames varied from 28,000 to 36,000. Using this equation, estimate how much it would cost Garvin to manufacture 36,000 bicycle frames. How much more or less costly is it to manufacture the frames rather than to acquire them from Ryan?
3. What other information would you need to be confident that the equation in requirement 2 accurately predicts the cost of manufacturing bicycle frames?