3- Rolf Corporation manufactures bicycle wheels for race use. The company is planning to produce new carbon wheels. These lighter wheels require a component that Rolf Corporation can either make or buy from a subcontractor. The subcontractor will sell the part for $98. The costs for making 6,000 units of the part are as follows:

Direct materials: $40 per unit

Direct labor: $30 per unit

Variable manufacturing overhead: $20 per unit

Fixed manufacturing overhead: $80,000*

*The $80,000 fixed manufacturing overhead includes $48,000 of indirect fixed costs allocated to the part and $32,000 for a production manager specifically dedicated to the part.

If the part is produced, Rolf Corporation will use an idle machine it already owns. If the part is bought, the company plans to rent the machine and the factory space to another company for $16,000 and $28,000 a year, respectively.

Rolf Corporation expects that, if the part is produced, the company will be able to schedule production so that no warehouse space will be needed. However, if the part is bought, Rolf will need to use warehouse space, for which it will have to pay $4,000 a year in rent.

Instructions

Would you recommend that Rolf make or buy the component? Why?