Munoz Bike Company makes the frames used to build its bicycles. During Year 2, Munoz made 26,000 frames; the costs incurred follow. Unit-level materials costs (26,000 units × $50) Unit-level labor costs (26,000 units x $53) Unit-level overhead costs (26,000 x $9) Depreciation on manufacturing equipment Bike frame production supervisor's salary Inventory holding costs Allocated portion of facility-level costs Total costs Munoz has an opportunity to purchase frames for $114 each. Additional Information $ 1,300,000 1,378,000 234,000 93,000 55,800 380,000 490,000 $ 3,930,800 1. The manufacturing equipment, which originally cost $580,000, has a book value of $490,000, 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 $76,000 per year. 2. Munoz has the opportunity to purchase for $1,020,000 new manufacturing equipment that will have an expected useful life of four 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. 3. If Munoz outsources the frames, the company can eliminate 70 percent of the inventory holding costs.
Munoz Bike Company makes the frames used to build its bicycles. During Year 2, Munoz made 26,000 frames; the costs incurred follow. Unit-level materials costs (26,000 units × $50) Unit-level labor costs (26,000 units x $53) Unit-level overhead costs (26,000 x $9) Depreciation on manufacturing equipment Bike frame production supervisor's salary Inventory holding costs Allocated portion of facility-level costs Total costs Munoz has an opportunity to purchase frames for $114 each. Additional Information $ 1,300,000 1,378,000 234,000 93,000 55,800 380,000 490,000 $ 3,930,800 1. The manufacturing equipment, which originally cost $580,000, has a book value of $490,000, 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 $76,000 per year. 2. Munoz has the opportunity to purchase for $1,020,000 new manufacturing equipment that will have an expected useful life of four 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. 3. If Munoz outsources the frames, the company can eliminate 70 percent of the inventory holding costs.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Munoz Bike Company makes the frames used to build its bicycles. During Year 2, Munoz made 26,000 frames; the costs
incurred follow.
Unit-level materials costs (26,000 units × $50)
Unit-level labor costs (26,000 units × $53)
Unit-level overhead costs (26,000 × $9)
Depreciation on manufacturing equipment
Bike frame production supervisor's salary
Inventory holding costs
Allocated portion of facility-level costs
Total costs
Munoz has an opportunity to purchase frames for $114 each.
Additional Information
1. The manufacturing equipment, which originally cost $580,000, has a book value of $490,000, 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 $76,000 per
year.
2. Munoz has the opportunity to purchase for $1,020,000 new manufacturing equipment that will have an expected useful life
of four 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.
3. If Munoz outsources the frames, the company can eliminate 70 percent of the inventory holding costs.
Complete this question by entering your answers in the tabs below.
Required A
Required B Required C
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.
Note: Round "Avoidable cost per unit" to 2 decimal places.
Avoidable cost per unit
Profit will
Required A Required B
Old Equipment New Equipment
Required C
$ 1,300,000
1,378,000
234,000
93,000
55,800
380,000
490,000
$ 3,930,800
by
Should Munoz purchase new equipment or outsource?
Profit must
increase
by
Assuming that Munoz is considering whether to purchase the new equipment or outsource the bike frame, calculate the
impact on profitability between the two alternatives.
Note: Do not round intermediate calculations.
Purchase
Show less A
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