Bramble Rides makes bicycles. It has always purchased its bicycle tires from the

Question

Bramble Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $11 each but is currently considering making the tires in its own factory. The estimated costs per unit of making the tires are as follows:

The company’s fixed expenses would increase by $29,310 per year if managers decided to make the tire.

(a1) Calculate total relevant cost to make or buy if the company needs 6,310 tires a year.

(a2) Ignoring qualitative factors, if the company needs 6,310 tires a year, should it continue to purchase them from Balyo or begin to produce them internally?

Explanation / Answer

a1 Total relevant cost: Make 86100 =6310*(3+5+1)+29310 Buy 69410 =6310*11 a2 The company should continue to purchase the tires

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