Incremental analysis - make-or-buy decision

Paramount Bikes, Inc., uses 10,000 derailleurs in its bicycles each year. Derailleurs currently cost the company $20.90 per unit to manufacture, determined as follows:

Direct material $50,600

Direct Labor $55,000

Variable Manufacturing Overhead $37,400

Fixed manufacturing Overhead $66,000

Total Costs $209,000

Cost per unit(209,000/10,000units) $20.90

Paramount Bikes, Inc., has been approached by an outside supplier that will provide derailleurs at a price of $16 per unit. If Paramount Bikes, Inc., stops producing derailleurs, the direct materials, direct labor, and variable manufacturing overhead will be eliminated, as will $30,000 of the fixed manufacturing overhead. Use incremental analysis to determine whether Paramount Bikes, Inc., should make or buy derailleurs. Complete the following schedule, and indicate in the space provided your decision to continue making, or to buy the part:

Make the Part Buy the Part Incremental Analysis

Manufacturing cost: ___________ __________ _________________

Direct materials ___________ _____0_____ _________________

Purchase Price

($16 per unit) ____0_______ __________ _________________

Totals ____________ ____________ _________________

Decision: ___________________________________________