arasota 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 rate of 1.08 per unit. The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, 70% of $120,000 of fixed manufacturing overhead currently being charged to the wheels will not be avoidable and will have to be absorbed by other products.

Required: Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer. Answer: