Kuhn Bicycle Company manufactures its own seats for its bicycles. The company is currently operating at $100\%$ capacity. 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 $$8\mathrm{.}00$ and $$7\mathrm{.}00,$ respectively. Normal production is $50,000$ bicycles per year.

A supplier offers to make the bicycle seats at a price of $$21$ each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $$25,000$ of fixed manufacturing overhead currently being charged to the bicycle seats will not be eliminated.

Instructions

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

$($b$)$ Should Kuhn Bicycle Company buy the seats from the outside supplier?C