Walton Bike Company makes the frames used to build its bicycles During year 2, Walton made 21,000 frames the costs incurred follow Unit level materials costs (21,000 units $49) $ 1,029,000 Unit level labor costs (21,000 units $56) 1,176,000 Unit level overhead costs (21,000 $11) 231,000 Depreciation on manufacturing equipment 90,000 Bike frame production supervisors salary 93,400 Inventory holding costs 280,000 Allocated portion of facility level costs 590,000 Total costs $ 3,489,400 Walton has an opportunity to purchase frames for $120 each Additional Information The manufacturing equipment, which originally cost $550,000, has a book value of $410,000, 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 Walton has the opportunity to purchase for $990,000 new manufacturing equipment that will have an expected useful life of 4 years and a salvage value of $47,600 This equipment will increase productivity substantially, reducing unit level labor costs by 50 percent Assume that Walton will continue to produce and sell 21,000 frames per year in the future If Walton outsources the frames, the company can eliminate 70 percent of the inventory holding costs Required Determine the avoidable cost per unit of making the bike frames, assuming that Walton 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 Walton outsource the bike frames Assuming that Walton 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 Walton is considering whether to either purchase the new equipment or outsource the bike frame, calculate the impact on profitability between the two alternatives

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Posted on Jul 31, 2024

Walton Bike Company makes the frames used to build its bicycles. During year 2, Walton made 21,000 frames; the costs incurred follow.


Unit-level materials costs (21,000 units $49)	$	1,029,000
Unit-level labor costs (21,000 units $56)		1,176,000
Unit-level overhead costs (21,000 $11)		231,000
Depreciation on manufacturing equipment		90,000
Bike frame production supervisors salary		93,400
Inventory holding costs		280,000
Allocated portion of facility-level costs		590,000
Total costs	$	3,489,400

Walton has an opportunity to purchase frames for $120 each. Additional Information

The manufacturing equipment, which originally cost $550,000, has a book value of $410,000, 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.
Walton has the opportunity to purchase for $990,000 new manufacturing equipment that will have an expected useful life of 4 years and a salvage value of $47,600. This equipment will increase productivity substantially, reducing unit-level labor costs by 50 percent. Assume that Walton will continue to produce and sell 21,000 frames per year in the future.
If Walton outsources the frames, the company can eliminate 70 percent of the inventory holding costs.

Required

Determine the avoidable cost per unit of making the bike frames, assuming that Walton 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 Walton outsource the bike frames?
Assuming that Walton 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 Walton is considering whether to either purchase the new equipment or outsource the bike frame, calculate the impact on profitability between the two alternatives.