Problem 13 29 Outsourcing decision affected by equipment replacement LO 13 3, 13 5 Rooney Bike Company makes the frames used to build its bicycles During 2018, Rooney made 25,000 frames the costs incurred follow Unit level materials costs (25,000 units $53) $ 1,325,000 Unit level labor costs (25,000 units $53) 1,325,000 Unit level overhead costs (25,000 $8) 200,000 Depreciation on manufacturing equipment 97,000 Bike frame production supervisors salary 65,500 Inventory holding costs 360,000 Allocated portion of facility level costs 500,000 Total costs $ 3,872,500 Rooney has an opportunity to purchase frames for $115 each Additional Information The manufacturing equipment, which originally cost $510,000, has a book value of $480,000, 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 $68,000 per year Rooney has the opportunity to purchase for $940,000 new manufacturing equipment that will have an expected useful life of five years and a salvage value of $37,500 This equipment will increase productivity substantially, reducing unit level labor costs by 60 percent Assume that Rooney will continue to produce and sell 25,000 frames per year in the future If Rooney outsources the frames, the company can eliminate 90 percent of the inventory holding costs Required Determine the avoidable cost per unit of making the bike frames, assuming that Rooney 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 Rooney outsource the bike frames Assuming that Rooney 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 Rooney is considering whether to either purchase the new equipment or outsource the bike frame, calculate

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Problem 13-29 Outsourcing decision affected by equipment replacement LO 13-3, 13-5

Rooney Bike Company makes the frames used to build its bicycles. During 2018, Rooney made 25,000 frames; the costs incurred follow:


Unit-level materials costs (25,000 units $53)	$	1,325,000
Unit-level labor costs (25,000 units $53)		1,325,000
Unit-level overhead costs (25,000 $8)		200,000
Depreciation on manufacturing equipment		97,000
Bike frame production supervisors salary		65,500
Inventory holding costs		360,000
Allocated portion of facility-level costs		500,000
Total costs	$	3,872,500

Rooney has an opportunity to purchase frames for $115 each.

Additional Information

The manufacturing equipment, which originally cost $510,000, has a book value of $480,000, 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 $68,000 per year.
Rooney has the opportunity to purchase for $940,000 new manufacturing equipment that will have an expected useful life of five years and a salvage value of $37,500. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that Rooney will continue to produce and sell 25,000 frames per year in the future.
If Rooney outsources the frames, the company can eliminate 90 percent of the inventory holding costs.

Required

Determine the avoidable cost per unit of making the bike frames, assuming that Rooney 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 Rooney outsource the bike frames?
Assuming that Rooney 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 Rooney is considering whether to either purchase the new equipment or outsource the bike frame, calculate.