Delightful Unicycle Company has been manufacturing its own seats for its unicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 unicycles per year.

A supplier offers to make the unicycle seats at a price of $20 each. If the unicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the unicycle seats will have to be absorbed by other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.

(b) Should Delightful Unicycle Company buy the seats from the outside supplier? Justify your answer.