Munoz Bike Company makes the frames used to build its bicycles. During 2018, Munoz made 26,000 frames; the costs incurred follow: Unit-level materials costs (26,000 units × $50) $1,300,000
Unit-level labor costs (26,000 units × $53) 1,378,000
Unit-level overhead costs (26,000 × $9) 234,000
Depreciation on manufacturing equipment 93,000
Bike frame production supervisor’s salary 55,800
Inventory holding costs 380,000
Allocated portion of facility-level costs 490,000
Total costs $3,930,800
Munoz has an opportunity to purchase frames for $114 each.
Additional Information
The manufacturing equipment, which originally cost $580,000, has a book value of $490,000, 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.
Munoz has the opportunity to purchase for $1,020,000 new manufacturing equipment that will have an expected useful life of 4 years and a salvage value of $40,000. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that Munoz will continue to produce and sell 26,000 frames per year in the future.
If Munoz 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 Munoz 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 Munoz outsource the bike frames?
b. Assuming that Munoz 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 Munoz is considering whether to either purchase the new equipment or outsource the bike frame, calculate.