Problem 13-26 Outsourcing decision affected by equipment replacement LO 13-3, 13-5

Cruger Bike Company (CBC) makes the frames used to build its bicycles. During 2014, CBC made 20,000 frames; the costs incurred follow.

Unit-level materials costs (20,000 units $30) $ 600,000 Unit-level labor costs (20,000 units $40) 800,000 Unit-level overhead costs (20,000 $10) 200,000 Depreciation on manufacturing equipment 120,000 Bike frame production supervisors salary 70,000 Inventory holding costs 290,000 Allocated portion of facility-level costs 500,000 Total costs $ 2,580,000 CBC has an opportunity to purchase frames for $85 each.

Additional Information 1. The manufacturing equipment, which originally cost $550,000, has a book value of $450,000, 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 $70,000 per year. 2. CBC has the opportunity to purchase for $910,000 new manufacturing equipment that will have an expected useful life of four years and a salvage value of $70,000. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that CBC will continue to produce and sell 20,000 frames per year in the future. 3. If CBC outsources the frames, the company can eliminate 80 percent of the inventory holding costs.Required

a-1. Determine the avoidable cost per unit of making the bike frames, assuming that CBC is considering the alternatives of making the product using the existing equipment or outsourcing the product to the independent contractor. (Round your answer to 2 decimal places.)

a-2. Should CBC outsource the bike frames? Yes No

b-1. Assuming that CBC 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. (Round your answers to 2 decimal places.)

b-2. Calculate the increase or decrease in the company's profit if the company uses new equipment. (Do not round intermediate calculations.)

c-1. Should CBC purchase new equipment or outsource? Purchase Outsource

c-2. Based on the above answer, calculate the increase or decrease in the company's profit. (Do not round intermediate calculations.)