Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racingbikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtainthe economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each tomake. The following is a detailed breakdown of current production costs.ItemUnit Cost TotalUnit Level Costs Materials$16160,000Labor12120,000Overhead220,000Allocated Facility Level Cost440,000Total$34340,000After seeing these figures, Steele’s president remarked that it would be foolish for the company to continue to produce the handlebars at $34each when it can buy them for $31 each.RequiredCalculate the total relevant cost. Do you agree with the president’s conclusion? Per UnitTotalTotal Relevant Cost

While dealing with the decision of make or buy, the relevant costs are the one which is vital. And relevant cost is defined as the cost that are avoidable when the product is purchased instead of made. Generally, variable overhead, direct materials and direct labor are avoidable. Computing the relevant cost as: Unit Total Materials $16 $160,000 Labor $12 $120,000 Overhead $2 $20,000 Aggregate relevant cost $30 $300,000 No, not agreed with the conclusion of president as the total relevant cost is $30 for making the product (handlebars) whereas for buying the cost is $31, which is more than the making. So, making the product is the best decision.

Answered: Steele Bicycle Manufacturing Company…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

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
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?

	Per Unit	Total
Total Relevant Cost

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