Question - Wheel R Us produces bicycles. In the past, it has made all components of the product in house. The selling price of the most popular bicycle, named the Ontario Flyer, with unit sales of 30,000 per year, is $350. The unit cost for this bicycle follows;
DM $95
DL 45
VOH 5
FOH 25
Recently, a firm located in Vancouver has contacted the buyers of Wheels R Us and offered to sell them gear mechanisms at $10 each. The supplier guarantees the quality of the product and offer to alter it in any way necessary so it fits seamlessly into the production process for the Ontario Flyer. The current cost for the gear mechanism if produced in house is:
DM $5
DL 3
VOH 1
FOH 5
1. Compute the contribution margin percentage for the Ontario Flyer.
2. Should ABC accept the offer to buy the gear mechanisms or continue to produce them in house?