Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtain the economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each to make. The following is a detailed breakdown of current production costs. Item Unit Cost Total Unit Level Costs Materials $16 160,000 Labor 12 120,000 Overhead 2 20,000 Allocated Facility Level Cost 4 40,000 Total $34 340,000 After seeing these figures, Steele’s president remarked that it would be foolish for the company to continue to produce the handlebars at $34 each when it can buy them for $31 each. Required Calculate the total relevant cost. Do you agree with the president’s conclusion?
Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtain the economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each to make. The following is a detailed breakdown of current production costs. Item Unit Cost Total Unit Level Costs Materials $16 160,000 Labor 12 120,000 Overhead 2 20,000 Allocated Facility Level Cost 4 40,000 Total $34 340,000 After seeing these figures, Steele’s president remarked that it would be foolish for the company to continue to produce the handlebars at $34 each when it can buy them for $31 each. Required Calculate the total relevant cost. Do you agree with the president’s conclusion?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing
bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtain
the economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each to
make. The following is a detailed breakdown of current production costs.
| Item | Unit Cost | Total |
| Unit Level Costs | ||
| Materials | $16 | 160,000 |
| Labor | 12 | 120,000 |
| 2 | 20,000 | |
| Allocated Facility Level Cost | 4 | 40,000 |
| Total | $34 | 340,000 |
After seeing these figures, Steele’s president remarked that it would be foolish for the company to continue to produce the handlebars at $34
each when it can buy them for $31 each.
Required
Calculate the total relevant cost. Do you agree with the president’s conclusion?
| Per Unit | Total | |
| Total Relevant Cost | ||
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