Reference no: EM132894256

Question - Bow Valley bicycles, has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity and variable manufacturing overhead is charged to production at the ratebof 50% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $5.00 and $5.60 respectively. Normal production is 100,000 wheels per year. A supplies offers to make the wheels of a price at $10.00 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated.

Required -

(a) Prepare an incremental analysis for the decision to make or buy the wheels.

(b) Should Sarasola Bicycles buy the wheels from the outside supplier? Justify your answer.