Question

The Stella Bicycle Company expects to produce 5,300 bicycles this year. Currently Stella also makes the chains for its bicycles. Stella's accountant reports the following costs for making 5,300 chains.
Direct materials are $4.11 per chain.
Direct manufacturing cost is $2.05 per chain.
Variable manufacturing overhead (power and utilities) is $1.05 per chain.
Inspection, setup, and material costs are $2,300.
Leasing the machine for the chains is $4,500.
Administration for the facility, including taxes and insurance is $45,000.
Stella has received an offer from an outside vendor to supply chains for $14.54 per chain.
The costs for the machine lease are the payments Stella makes for renting the equipment used in making the chains. If Stella buys all of its chains from the outside vendor, it does not need this machine.
Stella will not need to pay the variable costs or the inspection and setup costs if it purchases chains from the outside vendor.
Assume that if Stella purchases the chains from the ouside supplier, the facility where the chains are currently made will remain idle. Should Stella accept the outside supplier's offer at the anticipated production (and sales) volume of 5,300 units or continue to produce the chains in house? Enter the cost ($) of the preferred option

Answer 1