outsourcing decision 458528

Exercises: 13 8

Roaming Bicycle
Manufacturing Company currently produces the handlebars used in manufacturing
its bicycles, which are high quality racing bikes with limited sales. Roaming produces
and sells only 6,000 bikes each year. Due to the low volume of activity,
Roaming is unable to obtain the economies of scale that larger producers
achieve. For example, Roaming could buy the handlebars for $35 each; they cost
$38 each to make. The following is a detailed breakdown of current production
costs.

Item Unit Cost Total Unit level
costs

Materials $ 18
108,000

Labor 12
72,000

Overhead 3
18,000

Allocated facility level
costs 5 Total $ 38
$ 228,000

After seeing the
figures, Roaming’s president remarked that it would be foolish for the company
to continue to produce the handlebars at $38 each when it can buy them for $35
each

Do you agree with the president’s conclusion?
Support your answers with appropriate computations.