Question

Perez Bike Company makes the frames used to build its bicycles. During 2018, Perez made 24,000 frames; the costs incurred follow:

Unit-level materials costs (24,000 units × $55)	$	1,320,000
Unit-level labor costs (24,000 units × $58)		1,392,000
Unit-level overhead costs (24,000 × $10)		240,000
Depreciation on manufacturing equipment		94,000
Bike frame production supervisor’s salary		81,400
Inventory holding costs		310,000
Allocated portion of facility-level costs		470,000
Total costs	$	3,907,400

Perez has an opportunity to purchase frames for $118 each.

Additional Information

1. The manufacturing equipment, which originally cost $570,000, has a book value of $460,000, a remaining useful life of five years, and a zero salvage value. If the equipment is not used to produce bicycle frames, it can be leased for $69,000 per year.

2. Perez has the opportunity to purchase for $920,000 new manufacturing equipment that will have an expected useful life of five years and a salvage value of $71,000. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that Perez will continue to produce and sell 24,000 frames per year in the future.

3. If Perez outsources the frames, the company can eliminate 80 percent of the inventory holding costs.

Required

1. Determine the avoidable cost per unit of making the bike frames, assuming that Perez is considering the alternatives of making the product using the existing equipment or outsourcing the product to the independent contractor. Based on the quantitative data, should Perez outsource the bike frames?

2. Assuming that Perez is considering whether to replace the old equipment with the new equipment, determine the avoidable cost per unit to produce the bike frames using the new equipment and the avoidable cost per unit to produce the bike frames using the old equipment. Calculate the increase or decrease in the company's profit if the company uses new equipment.

3. Assuming that Perez is considering whether to either purchase the new equipment or outsource the bike frame, calculate.

Assuming that Perez is considering whether to replace the old equipment with the new equipment, determine the avoidable cost per unit to produce the bike frames using the new equipment and the avoidable cost per unit to produce the bike frames using the old equipment. Calculate the increase or decrease in the company's profit if the company uses new equipment. (Round "Avoidable cost per unit" to 2 decimal places.)

Answer 1