Question

Walton Bike Company makes the frames used to build its bicycles. During 2018, Walton made 21,000 frames; the costs incurred follow: Unit-level materials costs (21,000 units × $49) $ 1,029,000 Unit-level labor costs (21,000 units × $56) 1,176,000 Unit-level overhead costs (21,000 × $11) 231,000 Depreciation on manufacturing equipment 90,000 Bike frame production supervisor’s salary 93,400 Inventory holding costs 280,000 Allocated portion of facility-level costs 590,000 Total costs $ 3,489,400 Walton has an opportunity to purchase frames for $120 each. Additional Information The manufacturing equipment, which originally cost $550,000, has a book value of $410,000, 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 $76,000 per year. Walton has the opportunity to purchase for $990,000 new manufacturing equipment that will have an expected useful life of four years and a salvage value of $47,600. This equipment will increase productivity substantially, reducing unit-level labor costs by 50 percent. Assume that Walton will continue to produce and sell 21,000 frames per year in the future. If Walton outsources the frames, the company can eliminate 70 percent of the inventory holding costs. Required Determine the avoidable cost per unit of making the bike frames, assuming that Walton 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 Walton outsource the bike frames? Assuming that Walton 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. Assuming that Walton is considering whether to either purchase the new equipment or outsource the bike frame, calculate.

Required A

Required B

Required C

Determine the avoidable cost per unit of making the bike frames, assuming that Walton 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 Walton outsource the bike frames? (Round your answer to 2 decimal places.)

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

Assuming that Walton 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.)

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	Old Equipment New Equipment Avoidable cost per unit Profit must increase by

Assuming that Walton is considering whether to either purchase the new equipment or outsource the bike frame, calculate. (Do not round intermediate calculations.)

	Should Walton purchase new equipment or outsource? Purchase Profit must increase by

Answer 1

Answer 1.
Calculation of Avoidable Cost Per Unit
	Amount
Material Costs - 21,000 Nos X $49	1,029,000.00
Labor Costs - 21,000 Nos X $56	1,176,000.00
Overhead Costs - 21,000 Nos X $11	231,000.00
Opportunity Cost of Equipment Lease	76,000.00
Bike Frame Production Supervisor's Salary	93,400.00
Inventory Holding Cost - $280,000 X 70%	196,000.00
Total Costs	2,801,400.00
Avoidable Cost per Unit - $2,801,400 / 21,000	133.40
Answer 2.
Cost per Frame from Contractor	120.00
Avoidable Cost per Unit - $2,801,400 / 21,000	133.40
Savings per Unit if frame is Outsourced	13.40
Yes, the company should outsource manuacture of Bike Frames.
Answer 3.
Calculation of Avoidable Cost Per Unit
	Amount
Material Costs - 21,000 Nos X $49	1,029,000.00
Labor Costs - 21,000 Nos X $56 X 50%	588,000.00
Overhead Costs - 21,000 Nos X $11	231,000.00
Opportunity Cost of Equipment Lease	76,000.00
Bike Frame Production Supervisor's Salary	93,400.00
Inventory Holding Cost - $280,000 X 70%	196,000.00
Total Costs	2,213,400.00
Avoidable Cost per Unit - $2,213,400 / 21,000	105.40
Answer 4
Cost per Frame from Contractor	120.00
Avoidable Cost per Unit - New Mach.	105.40
Savings per Unit if frame is Outsourced	(14.60)
No, the company should manuacture the frame from the new machinery.