Question

Bramble Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $10 each but is currently considering making the tires in its own factory. The estimated costs per unit of making the tires are as follows: Direct materials $3 Direct labor $5 Variable manufacturing overhead $2 The company’s fixed expenses would increase by $28,630 per year if managers decided to make the tire. (a1) Calculate total relevant cost to make or buy if the company needs 5,210 tires a year. Make Buy Total relevant cost $ $ (a2) Ignoring qualitative factors, if the company needs 5,210 tires a year, should it continue to purchase them from Balyo or begin to produce them internally? The company to purchase the tires.

Answer 1

Solution

Bramble Rides

A1. Calculation of total relevant cost to make or buy if the company needs 5,210 tires a year:

Relevant cost to MAKE 5,210 units			Relevant Cost to BUY 5,210 units
Direct materials	$3	$15,630	Purchase cost	at $10 per unit	$52,100
Direct labor	$5	$26,050
Variable overhead	$2	$10,420
Total fixed cost	$10 per unit	$52,100
Add: increase in fixed expenses		$28,630
Total relevant cost		$80,730

The total relevant cost would increase by $28,630 ($80,730 - $52,100) if the company opts to MAKE. Hence, the company has to buy the component firm outside supplier.

1. Other considerations to purchase the tires –

Product Quality

Timely delivery and Product Performance

Impact of High increase in fixed costs on the overall financial capability of the company.

What Alternative uses of excess capacity.