Reference no: EM131468365

The Ace Bicycle Company expects to produce 8,000 bicycles this year. Currently Ace also makes the chains for its bicycles. Ace’s accountant reports the following costs for making 8,000 chains.

Direct materials are $5.00 per chain.

Direct manufacturing is $2.50 per chain.

Variable manufacturing overhead (power and utilities) is $1.50 per chain.

Inspection, setup, and material costs are $2,500.

Leasing the machine for the chains is $3,500.

Administration for the fixed plant, taxes, and insurance is $40,000.

Ace has received an offer from an outside vendor to supply chains for $10.20 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.

a) Assume that if Ace purchases the chains from the outside supplier, the facility where the chains are currently made will remain idle. Should Ace accept the outside supplier’s offer at the anticipated production (and sales) volume of 8,000 units?

b) For this part, assume that if the chains are purchased outside, the facilities 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 on bicycles will be raised by $21. The variable per unit cost of the upgrade would be $18, and additional fixed costs of $14,000 would be incurred. Should Ace make or buy the chains, assuming that 8,000 units are produced (and sold)?