=+8-36 KK Make versus buy, activity-based costing, opportunity costs (N. Melumad and S. Reichelstein, adapted) OBJECTIVES 2, 4 Ace Ltd produces bicycles. This year’s expected production is 20000 units. Currently, Ace Ltd makes the chains for its bicycles. Ace Ltd’s management accountant reports the following costs for making the 20000 bicycle chains:

Cost per unit Costs for 20 000 units Direct materials $10.00 $200 000 Direct manufacturing labour 5.00 100 000 Variable manufacturing overhead (power and utilities) 2.50 50 000 Inspection, set-up, materials handling 4 000 Machine rent 8 000 Allocated fixed costs of plant administration, taxes and insurance 50 000 Total costs $412 000 Ace Ltd has received an offer from an outside vendor to supply any number of chains Ace Ltd requires at $18.50 per chain.

The following additional information is available:

a Inspection, set-up and materials-handling costs vary with the number of batches in which the chains are produced. Ace Ltd produces chains in batch sizes of 1000 units. Ace Ltd will produce the 20000 units in 20 batches.