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5 December, 15:56

Steele Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Steele produces and sells only 10,000 bikes each year. Due to the low volume of activity, Steele is unable to obtain the economies of scale that larger producers achieve. For example, Steele could buy the handlebars for $31 each; they cost $34 each to make.

The following is a detailed breakdown of current production costs:

Item Unit Cost Total

Unit-level costs

Materials $16 $160,000

Labor 12 120,000

Overhead 2 20,000

Allocated facility-level costs 4 40,000

Total $34 $340,000

After seeing these figures, Steele's president remarked that it would be foolish for the company to continue to produce the handlebars at $34 each when it can buy them for $31 each.

Calculate the total relevant cost. Do you agree with the president's conclusion?

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  1. 5 December, 15:58
    0
    Total relevant cost = $300,000

    No, we do not agree with the president

    Explanation:

    The computation of total relevant cost is shown below:-

    Total Relevant cost

    Unit Total

    Material $16 $160,000

    labor $12 $120,000

    Overheads $2 $20,000

    Total relevant cost $30 $300,000

    Note : - Total relevant cost = $160,000 + $120,000 + $20,000

    = $300,000

    No, we do not agree with the president.
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