a. Determine the avoidable cost per unit of making the bike frames, assuming that Solomon 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 Solomon outsource the bike frames?
a. Determine the avoidable cost per unit of making the bike frames, assuming that Solomon 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 Solomon outsource the bike frames?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Solomon Bike Company makes the frames used to build its bicycles. During Year 2, Solomon made 20,000 frames; the costs incurred
follow.
Unit-level materials costs (20,000 units x $55)
Unit-level labor costs (20,000 units x $56)
Unit-level overhead costs (20,000 x $9)
Depreciation on manufacturing equipment
Bike frame production supervisor's salary
Inventory holding costs
Allocated portion of facility-level costs
Total costs
Solomon has an opportunity to purchase frames for $112 each.
Additional Information
$ 1,100,000
1,120,000
180,000
96,000
79,000
240,000
520,000
$ 3,335,000
1. The manufacturing equipment, which originally cost $520,000, has a book value of $470,000, a remaining useful life of four
and a zero salvage value. If the equipment is not used to produce bicycle frames, it can be leased for $71,000 per year.
years,
2. Solomon 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 $88,000. This equipment will increase productivity substantially, reducing unit-level labor costs by 70
percent. Assume that Solomon will continue to produce and sell 20,000 frames per year in the future.
3. If Solomon 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 Solomon 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 Solomon outsource the bike frames?
b. Assuming that Solomon 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 Solomon is considering whether to purchase the new equipment or outsource the bike frame, calculate the impact
on profitability between the two alternatives.
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