Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 63

CVP Analysis Babbott Bicycle Company (BBC) is a high-end manufacturer of bicycles. Its products are sold in specialty retail bike stores throughout the United States and Canada. This year’s expected production is 10,000 units, but demand in the bicycle market has fluctuated in recent years so that BBC is also predicting that the actual production/sales figure could be anywhere between 7,000 and 15,000 bikes. To control quality, BBC currently makes most of the parts for its bikes, including the rear brake. BBC’s accountant reports the following costs for making the 10,000 rear brake assemblies:

	Per-Unit Costs	Costs for 10,000 Units
Direct materials	$10.00	$100,000
Direct manufacturing labor	6.00	60,000
Variable manufacturing overhead (power and utilities)	3.00	30,000
Inspection, setup, materials handling	2.00	20,000
Machine lease	3.40	$34,000
Allocated fixed plant administration, taxes, and insurance	6.00	60,000
Total costs		$304,000

An outside vendor has offered to supply up to 20,000 brake assemblies to BBC for $25 each. The following additional information is available:

• BBC’s machine lease costs are for the equipment used to make the brakes. If BBC buys all brakes from the outside vendor, it will be able to cancel the lease and avoid this cost. All other fixed costs will not be affected.

Required Assume that if BBC purchases the brake assemblies from the outside supplier, the facility where it currently makes them will remain idle for at least the next year. At that point, BBC might consider leasing the space or using it for an alternative use. Should BBC accept the outside supplier’s offer? Support your answer using CVP analysis. Include an assessment of the strategic issues facing BBC that might affect your answer.

Step 1 of 4

Indifference Point

Indifference point can be defined as that point where the costs for the company or individual remain the same under all available options. Thus, the concerned company is indifferent between the options and can opt for any of the available options.