Perez Bike Company makes the frames used to build its bicycles.During 2018, Perez made 24,000 frames; the costs incurredfollow:
| |
| 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
The manufacturing equipment, which originally cost $570,000, hasa book value of $460,000, a remaining useful life of five years,and a zero salvage value. If the equipment is not used to producebicycle frames, it can be leased for $69,000 per year.
Perez has the opportunity to purchase for $920,000 newmanufacturing equipment that will have an expected useful life offive years and a salvage value of $71,000. This equipment willincrease productivity substantially, reducing unit-level laborcosts by 60 percent. Assume that Perez will continue to produce andsell 24,000 frames per year in the future.
If Perez outsources the frames, the company can eliminate 80percent of the inventory holding costs.
Required
Determine the avoidable cost per unit of making the bike frames,assuming that Perez is considering the alternatives of making theproduct using the existing equipment or outsourcing the product tothe independent contractor. Based on the quantitative data, shouldPerez outsource the bike frames?
Assuming that Perez is considering whether to replace the oldequipment with the new equipment, determine the avoidable cost perunit to produce the bike frames using the new equipment and theavoidable cost per unit to produce the bike frames using the oldequipment. Calculate the increase or decrease in the company'sprofit if the company uses new equipment.
Assuming that Perez is considering whether to either purchasethe new equipment or outsource the bike frame, calculate.
