Question

"The Ace Bicycle Company expects to produce 7,400 bicycles this year. Currently Ace also makes the chains for its bicycles. Ace's accountant reports the following costs for making 7,400 chains. Direct materials are $3.03 per chain. Direct manufacturing cost is $1.51 per chain. Variable manufacturing overhead (power and utilities) is $0.51 per chain. Inspection, setup, and material costs are $3,700. Leasing the machine for the chains is $5,000. Administration for the facility, including taxes and insurance is $43,000. Ace has received an offer from an outside vendor to supply chains for $10.86 per chain. The costs for the machine lease are the payments Ace makes for renting the equipment used in making the chains. If Ace buys all of its chains from the outside vendor, it does not need this machine. Ace 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 the chains are purchased from the outside supplier, the facility where the chains are currently made will be used to upgrade the bicycles by adding mud flaps and reflector bars. As a consequence, the selling price for the bicycles will increase by $27. The variable cost per unit of the upgrade would be $13.21, and an additional fixed cost of $17,800 would be incurred. Should Ace make or buy the chains, assuming that 7,400 units are produced (and sold)? Enter the cost ($) of the preferred option. When calculating the cost of the upgrade option, please subtract the additional revenue gained from selling the upgrade."

Answer 1

The company must Purchase the chains from outside as the cost is way lower than producing it in house