Homework SourseZachary Bike Company makes the frames used to build its bicy
Zachary Bike Company makes the frames used to build its bicycles. During 2018, Zachary made 21,000 frames; the costs incurred follow:
Zachary has an opportunity to purchase frames for $119 each.
Additional Information
The manufacturing equipment, which originally cost $590,000, has a book value of $430,000, a remaining useful life of six years, and a zero salvage value. If the equipment is not used to produce bicycle frames, it can be leased for $79,000 per year.
Zachary has the opportunity to purchase for $950,000 new manufacturing equipment that will have an expected useful life of six years and a salvage value of $85,400. This equipment will increase productivity substantially, reducing unit-level labor costs by 50 percent. Assume that Zachary will continue to produce and sell 21,000 frames per year in the future.
If Zachary outsources the frames, the company can eliminate 90 percent of the inventory holding costs.
Required
A. Determine the avoidable cost per unit of making the bike frames, assuming that Zachary 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 Zachary outsource the bike frames?
Avoidable Cost Per Unit: ?
B. Assuming that Zachary 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.
| Unit-level materials costs (21,000 units × $51) | $ | 1,071,000 | |
| Unit-level labor costs (21,000 units × $57) | 1,197,000 | ||
| Unit-level overhead costs (21,000 × $10) | 210,000 | ||
| Depreciation on manufacturing equipment | 91,000 | ||
| Bike frame production supervisor’s salary | 64,400 | ||
| Inventory holding costs | 340,000 | ||
| Allocated portion of facility-level costs | 600,000 | ||
| Total costs | $ | 3,573,400 | |
Solution
Solution A:
Avoidable cost per unit of making the bike frames = Total relevant cost of mpaking bike frames / nos of units
= $2,927,400 /21000 = $139.40 per unit
As cost making is higher than cost of buying therefore company should outsource the bike frames
Solution B:
Avoidable cost per unit to produce the bike frames using the new equipment = $2,394,000 / 21000 = $114
Avoidable cost per unit to produce the bike frames using the old equipment = $2,927,400 / 21000 = $139.40
If company uses new equipment then profit will increase by $533,400.
| Differential Analysis - Making Frame (alt 1) or Buying Frame (Alt2) - Zachary | |||
| Particulars | Making Frame (Alt 1) | Buying Frame (Alt 2) | Financial advantage (Disadvantage) of buying (Alternative 2) |
| Relevant Costs: | |||
| Purchase Price (21000*$119) | $0.00 | $2,499,000.00 | -$2,499,000.00 |
| Direct material | $1,071,000.00 | $0.00 | $1,071,000.00 |
| Direct Labor | $1,197,000.00 | $0.00 | $1,197,000.00 |
| Variable overhead | $210,000.00 | $0.00 | $210,000.00 |
| Bike frame production supervisor’s salary | $64,400.00 | $0.00 | $64,400.00 |
| Opportunity cost of equipment leasing | $79,000.00 | $0.00 | $79,000.00 |
| Inventory holding cost | $306,000.00 | $0.00 | $306,000.00 |
| Total Cost | $2,927,400.00 | $2,499,000.00 | $428,400.00 |
