Question

Baird Bike Company makes the frames used to build its bicycles. During 2018, Baird made 23,000 frames; the costs incurred follow:

Unit-level materials costs (23,000 units × $46)	$	1,058,000
Unit-level labor costs (23,000 units × $51)		1,173,000
Unit-level overhead costs (23,000 × $14)		322,000
Depreciation on manufacturing equipment		86,000
Bike frame production supervisor’s salary		69,500
Inventory holding costs		270,000
Allocated portion of facility-level costs		530,000
Total costs	$	3,508,500

Baird has an opportunity to purchase frames for $109 each.

Additional Information

The manufacturing equipment, which originally cost $570,000, has a book value of $451,000, 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 $75,000 per year.

Baird has the opportunity to purchase for $930,000 new manufacturing equipment that will have an expected useful life of four years and a salvage value of $59,600. This equipment will increase productivity substantially, reducing unit-level labor costs by 70 percent. Assume that Baird will continue to produce and sell 23,000 frames per year in the future.

If Baird outsources the frames, the company can eliminate 70 percent of the inventory holding costs.

Required

A. Determine the avoidable cost per unit of making the bike frames, assuming that Baird 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 Baird outsource the bike frames?

	Avoidable cost per unit for making the product per unit Baird should outsource the bike frames?

B. Assuming that Baird 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.

<a tabindex="1" aria-label="Assuming that [z(57)] 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.)="" show="" less'="" class="show gaga" style="margin: 0px; padding: 0px; border: 0px; color: rgb(22, 72, 131); font-weight: bold; outline: none; font-size: 11px; position: absolute; right: 24px;">Show less

	Old Equipment New Equipment Avoidable cost per unit Profit must by

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

	Should Baird purchase new equipment or outsource? Profit must by

Answer 1

		The avoidable cost per unit of bike frames
			Through exsiting machine	Through outsourcing to contractor	Through New equipment
		Total material costs	1058000		1058000
		Total Labor costs	1173000		351900
		Total overhead costs	322000		322000
		Bike frame's Production's manager's salary	69500		69500
		Inventory holding costs	270000	81000	270000
		Depreciation on new equipment			217600
		Price offered to purchase frame		2507000
		Opportunity Revenue lost(gained)	75000	-75000	-75000
		Total avoidable costs	2967500	2513000	2214000
Requirement		Avoidable cost per unit	118.7	100.52	88.56
Requirement a)		Avoidable cost per unit of making the bike frames is		118.7
		Finch should consider outsourcing the bike frames as its per unit cost is less than the per unit avoidable cost of manufacturing through old equipment
Requirement B				Old Equipment	New equipment
		Avoidable cost per unit of making the bike frames is		118.7	88.56
		Increase(Decrease) in company's profit if it uses new equipment instead of old equipment	Profit must increase by	753500
Requirement C				Old Equipment	Outsourcing
		Avoidable cost per unit of the bike frames is		118.7	100.52
		Increase(Decrease) in company's profit if it uses new equipment instead of outsourcing	Profit must increase by	299000