Exercise #2 (Make or Buy):

The Triangle Company is a major bicycle manufacturer in the USA. In so doing, it manufactures all bicycle components, including bicycle seats. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year.

A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.

(b) Should the Triangle Company buy the seats from the outside supplier? Justify your answer.