QUESTION II$-$Part B$.10$ MARKS

Escher Skateboards has been manufacturing its own wheels for its skateboards. Normal

production is $200,000$ wheels per year. The company is currently operating at $100\%$ capacity, and

variable manufacturing overhead is charged to production at the rate of $30\%$ of direct labour cost.

The direct materials and direct labour cost per unit to make the wheels are $$1\mathrm{.}50$ and $$1\mathrm{.}80,$

respectively. The production of wheels incurs scope $1$ emissions of $150$ grams of $CO2-$equivalents

per wheel and scope $2$ emissions of $50$ grams of $CO2-$equivalents per wheel. Assume that the

company is exposed to a carbon tax of $$50$ per tonne of $CO2-$equivalents.

The company expects to continue to produce at maximum capacity next year. Further, direct

materials costs are expected to increase by $30\%$ next year, while all other costs are expected to

remain the same.

A supplier offers a two$-$year contract to make the wheels at a price of $$4$ each for this year and

$$4\mathrm{.}50$ next year.

If the skateboard company accepts this two$-$year contract, all variable manufacturing costs will be

eliminated, but the $$42,000$ of fixed manufacturing overhead currently being charged to the

skateboard wheels will have to be absorbed by other products. The $CO2-$equivatents emissions for

wheels will be scope $3$ emissions of $300$ grams of $CO2-$equivalents per wheel.

Tasks: Answer the following questions:

a$)$ Classify each cost$/$benefit item as relevant cost$/$benefit$,$ sunk cost, or opportunity cost. $3$

marks

b$)$ Using the answer template in the corresponding Excel file, conduct an incremental

analysis for the two years that shows whether Escher Skateboards should produce the

wheels or outsource their production. $6$ marks

c$)$ Based on the incremental analysis, should the company continue to produce the wheels or

outsource their production. Select the right answer. $1$ mark

Note: Use a negative sign for costs in the incremental analysis template.