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Problem 13-8 Hill Bicycle Manufacturing Make or Buy

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Hill Bicycle Manufacturing company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Hill produces and sells only 6,000 bikes per year. Due to the low volume of activity, Hill could buy the handlebars for $28 each; they cost $32 to make. The following is a detailed breakdown of current production costs.
Item Unit Cost Total
Unit-level costs
Materials $14 $84,000
Labor $10 $60,000
Overhead $ 3 $18,000
Allocated facility-level costs $ 5 $30,000
Total $32 $192,000
After seeing these figures, Hill's president remarked that it would be foolish for the company to continue to produce the handlebars at $32 each when it can buy them for $28 each. Do you agree with president's conclusion? Support your answer with appropriate computations.

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Solution Summary

Your response is 117 words explaining how buying the handlebars will increase the firms total costs.

Solution Preview

While the handle bars would require them to pay $28 each from the vendor, they will not save $32 if they make the switch. The allocated facility costs will just be re-allocated to another component of the bikes and so the ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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