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Perez Bike Company makes the frames used to build its bicycles. During Year 2, 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 supervisors 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, has a book value of $460,000, a remaining useful life of four 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.

Perez has the opportunity to purchase for $920,000 new manufacturing equipment that will have an expected useful life of four 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.

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.3. Calculate the increase or decrease in the company's profit if the company uses new equipment.
3. Assuming that Perez is considering whether to purchase the new equipment or outsource the bike frame, calculate the impact on profitability between the two alternatives.

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