The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

False Value Hardware began 2013 with a credit balance of $31,900 in the allowance for sales returns account. Sales and cash collections from customers during the year were $680,000 and $640,000, respectively. False Value estimates that 5% of all sales will be returned. During 2013, customers returned merchandise for credit of $23,000 to their accounts. False Value's 2013 income statement would report net sales of: a. $657,000. b. $646,000. c. $648,100. d. $671,100.

Capitalisation method

Subject: financial accounting

Answer 2

Question

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Answer 6

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

Answer 7

Chapter 6, Problem 27PSA

a.

To determine

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

Answer 8

a.

Expert Solution

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Avoidable cost: The cost that can be rejected off completely or to some degree by choosing one option over another in a decision making circumstance. In managerial accounting, this term is identical with relevant cost and differential cost.

Determine the total avoidable costs

The facility-sustaining costs and stock holding costs about 20% remain the equivalent irrespective of whether frames are obtained or produced. Because these costs do not contrast between the alternatives, they are not avoidable. The depreciation cost is a sunk cost that is not avoidable. Nonetheless, the annual lease option of $70,000 is an opportunity cost that can be avoided if they quit producing the frames.

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Opportunity Cost+Inventory Holding Costs]=[($30×20,000)+($40×20,000)+($10×20,000)+$70,000+$70,000+($290,000×0.80)]=[$600,000+$800,000+$200,000+$70,000+$70,000+$232,000]=$1,972,000

Therefore the total avoidable cost is $1,972,000.

Determine the avoidable cost per unit

Avoidable Cost per unit=[Total Avoidable CostNumber of Units]=[$1,972,00020,000]=$98.60

Therefore the avoidable cost per unit is $98.60.

Determine the increase in income

Outsourcing will reduce the cost and increases the income.

Increase in Income=[Number of Units×(Avoidable Cost per unit−Purchase Price)]=[20,000×($98.60−$85)]=[20,000×$13.60]=$272,000

Therefore the increase in income is $272,000.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Conclusion

From the results obtained above, the avoidable cost of $98.60 is greater than the purchase cost of $85. Hence, Company CB should outsource the frames. Outsourcing would diminish cost and increases productivity by $272,000.

Therefore Company CB should outsource the bike frames.

Answer 13

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

Answer 14

b.

To determine

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

Answer 15

b.

Expert Solution

Explanation of Solution

Determine the total avoidable costs of old equipment:

Avoidable CostOld Equipment=[Unit Labor Cost+Opportunity Cost]=[($40×20,000)+$70,000]=$870,000

Therefore the total avoidable cost of old equipment is $870,000.

Determine the unit level labor costs

Unit Level Labor Costs=[Actual Labor Cost×(1−Change in Labor Cost)]=[$40×(1−60%)]=$16

Therefore the unit level labor cost is $16.

Determine the depreciation cost

Depreciation Cost=[Cost of New Equipment−Salvage ValueNumber of Years]=[$910,000−$70,0004]=[$840,0004]=$210,000

Therefore the depreciation cost is $210,000.

Determine the total avoidable costs of new equipment

Avoidable CostNew Equipment=[Unit Labor Cost+Depreciation Cost]=[($16×20,000)+$210,000]=$530,000

Therefore the total avoidable cost of new equipment is $530,000.

Determine the cost per unit of old equipment

Cost per unitOld Equipment=[Avoidable CostOld EquipmentNumber of Units]=[$870,00020,000]=$43.50

Therefore the cost per unit of old equipment is $43.50.

Determine the cost per unit of new equipment

Cost per unitNew Equipment=[Avoidable CostNew EquipmentNumber of Units]=[$530,00020,000]=$26.50

Therefore the cost per unit of new equipment is $26.50.

Determine the avoidable costs of using the old equipment

Avoidable CostOld Equipment=[Avoidable CostOld Equipment−Avoidable CostNew Equipment]=[$870,000−$530,000]=$340,000

Therefore the avoidable cost of using the old equipment is $340,000.

Answer 16

b.

Expert Solution

Answer 17

b.

Expert Solution

Answer 18

Expert Solution

Answer 19

Conclusion

From the results obtained above, the cost of depreciation of the new equipment is certifiably not a sunk cost for this situation on the grounds that the new equipment has not been bought. The avoidable cost of utilizing the current equipment is $340,000 greater than that of utilizing the new equipment. Thus, replacing the current equipment with the new equipment will build the organization's income by $340,000.

Therefore Company CB should replace the current equipment.

Answer 20

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

Answer 21

c.

To determine

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

Answer 22

c.

Expert Solution

Explanation of Solution

Determine the total avoidable costs between two alternatives (old and new equipment)

Avoidable Cost=[Unit Material Cost+Unit Labor Cost+Unit Overhead Cost+Supervisor Salary+Depreciation Expense+Inventory Holding Costs]=[($30×20,000)+($16×20,000)+($10×20,000)+$70,000+$210,000+($290,000×0.80)]=[$600,000+$320,000+$200,000+$70,000+$210,000+$232,000]=$1,632,000

Therefore the total avoidable cost between two alternatives is $1,632,000.

Determine the cost per unit between two alternatives (old and new equipment)

Cost per unit=[Avoidable CostNumber of Units]=[$1,632,00020,000]=$81.60

Therefore the cost per unit of old equipment is $81.60.

Determine the difference of cost per unit between two alternatives

Difference=[Actual Cost−Cost per unit]=[$85−$81.60]=$3.40

Therefore the difference of cost per unit between two alternatives is $3.40.

Determine the increase in profitability

Increase in Profitability=[Number of Units×Difference in Cost per unit]=[$3.40×20,000]=$68,000

Therefore the increase in profitability is $68,000.

Answer 23

c.

Expert Solution

Answer 24

c.

Expert Solution

Answer 25

Expert Solution

Answer 26

Conclusion

From the results obtained above, the cost per unit is $81.60, the savings from replacing the old equipment is $3.40 per frame and the increase in profitability is $68,000. Hence the old equipment should be replaced.

Therefore Company CB should replace the old equipment.

Answer 27

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Answer 28

d.

To determine

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

Answer 29

d.

Expert Solution

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company minimizes the risk of establishing supplier relationship is as follows:

Before focusing on the outsourcing decision, Company CB must think about the capacity of the provider or suppliers to deliver the frames as per the organization's quality principles. Likewise, Company CB must guarantee itself that the frames will be conveyed on a convenient premise. By outsourcing, Company CB is dropping the advantages of vertical integration.

The organization is reliant on the provider's enactment. The loss of control should be weighed in contradiction of the advantages of cost reduction. Company CB can shield itself from problematic providers by keeping up a rundown of licensed providers. Company CB should furnish these providers with hikes or incentives for providing exceptional services, for example, amount buys and quick invoice payment so as to increase favored customer standing.

Answer 30

d.

Expert Solution

Answer 31

d.

Expert Solution

Answer 32

Expert Solution

Answer 33

Ch. 6 - Prob. 1LO Ch. 6 - Make appropriate special order decisions. Ch. 6 - Prob. 3LO Ch. 6 - Prob. 4LO Ch. 6 - Prob. 5LO Ch. 6 - Prob. 6LO Ch. 6 - Prob. 7LO Ch. 6 - Prob. 1Q Ch. 6 - Prob. 2Q Ch. 6 - Prob. 3Q

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

Videos

The avoidable cost per unit of making the bike frames, based on the results whether Company CB should outsource the bike frames.

Explanation of Solution

The avoidable cost per unit of producing the bike frames using new equipment and old equipment and the impact on profitability if the frames are made using old equipment versus the new equipment.

Explanation of Solution

Whether Company CB should purchase the new equipment or outsource the bike frame and the impact on profitability between two alternatives.

Explanation of Solution

The qualitative factors Company CB should consider before making a decision to outsource and the ways in which the company must minimize the risk of establishing supplier relationship.

Explanation of Solution

Want to see more full solutions like this?

Chapter 6 Solutions