Sturdy Bike Company makes the frames used to build its bicycles. During year 2, Sturdy made 20,000 frames; the costs incurred follow.

Unit-level materials costs (20,000 units $35.00)	$	700,000
Unit-level labor costs (20,000 units $42.50)		850,000
Unit-level overhead costs (20,000 $10.00)		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	$	2,730,000

Sturdy has an opportunity to purchase frames for $92.50 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. Sturdy 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 Sturdy will continue to produce and sell 20,000 frames per year in the future.
3. If Sturdy outsources the frames, the company can eliminate 80 percent of the inventory holding costs.

Required

1. 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?

2. 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.

3. Assuming that Sturdy is considering whether to either purchase or outsource, calculate the impact on profitability between the two alternatives.

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	$106.10	per unit
Should Sturdy outsource the bike frames?		Yes

ssuming 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.)

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	Old Equipment	New Equipment
Avoidable cost per unit	$46.00	$27.50
Profit must	increase	by

Assuming that Sturdy is considering whether to either purchase or outsource, calculate the impact on profitability between the two alternatives. (Do not round intermediate calculations.)

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