Benson Bike Company makes the frames used to build its bicycles. During year 2, Benson made 20,000 frames, the costs incurred follow. Unit-level materials costs (20,800 units * $47) Unit-level labor costs (20,000 units x $52) Unit-level overhead costs (20,800 $12) Depreciation on manufacturing equipment Bike frame production supervisor's salary Inventory holding costs Allocated portion of facility-level costs Total costs $ 940,000 1,840,000 200,000 92,eee 80,000 340,888 488,888 $3,172,000 Benson has an opportunity to purchase frames for $120 each. Additional Information 1. The manufacturing equipment, which originally cost $550,000, has a book value of $480,000, a remaining useful life of 4 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. 2. Benson has the opportunity to purchase for $860,000 new manufacturing equipment that will have an expected useful life of 4 years and a salvage value of $28,000. This equipment will increase productivity substantially, reducing unit-level labor costs by 50 percent. Assume that Benson will continue to produce and sell 20,000 frames per year in the future. 3. If Benson outsources the frames, the company can eliminate 80 percent of the inventory holding costs. Required a. Determine the avoidable cost per unit of making the bike frames, assuming that Benson 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 Benson outsource the bike frames? b. Assuming that Benson 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. c. Assuming that Benson is considering whether to either purchase or outsource, calculate the impact on profitability between the two alternatives. Complete this question by entering your answers in the tabs below. Required A Required B Required Determine the avoidable cost per unit of making the bike frames, assuming that Benson 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 Benson outsource the bike frames? (Round your answer to 2 decimal places.) S Avoidable cost per unit for making the product Should Benson outsource the bike frames? 120.20 per unit Yes Required A Required B > Complete this question by entering your answers in the tabs below. Required A Required B Required Assuming that Benson 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 Avoidable cost per unit Profit must Old Equipment New Equipment S 55.805 20.80 increase by S 700,000 Complete this question by entering your answers in the tabs below. Required A Required B Required c Assuming that Benson is considering whether to either purchase or outsource, calculate the impact on profitability between the two alternatives. (Do not round intermediate calculations.) Should Benson purchase new equipment or outsource? Profit must increase by Purchase s 816,000
