Problem 13-29 Outsourcing decision affected by equipment replacement LO 13-3, 13-5 Sturdy Bike Company makes the frames used to build its bicycles. During 2018, Sturdy made 23,000 frames, the costs incurred follow: Unit-level materials costs (23,000 units $50) Unit-level labor costs (23,000 units x $58) Unit-level overhead costs (23,000 x $9) Depreciation on manufacturing equipment Bike frame production supervisor' s salary Inventory holding costs Allocated portion of facility-level costs Total costs $1,150,000 1,334,000 207,000 98,000 79,900 350,000 620,000 $3,838,900 Sturdy has an opportunity to purchase frames for $115 each Additional Information 1. The manufacturing equipment, which originally cost $570,000, has a book value of $420,000, a remaining useful life of five years and a zero salvage value. If the equipment is not used to produce bicycle frames, it can be leased for $73,000 per year. 2. Sturdy has the opportunity to purchase for $960,000 new manufacturing equipment that will have an expected useful life of five years and a salvage value of $77,500. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that Sturdy will continue to produce and sell 23,000 frames per year in the future 3. If Sturdy 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 Sturdy 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 Sturdy outsource the bike frames? b. Assuming that Sturdy 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 Sturdy 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 Sturdy 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 Sturdy outsource the bike frames? (Round your answer to 2 decimal places.) Avoidable cost per unit for making the product Sturdy should outsource the bike frames? per unit Required A Required B Required ARequired B Required C Assuming that Sturdy 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 Old Equipment New Equipment Avoidable cost per unit Profit must by Required A Required c Required A Required B Required C Assuming that Sturdy is considering whether to either purchase the new equipment or outsource the bike frame, calculate. (Do not round intermediate calculations.) Should Sturdy purchase new equipment or outsource? Profit must Required ed C Outsource Purchase
