Problem $6-27$A $($Static$)$ Outsourcing decision affected by equipment replacement LO $6-3,6-5$

Sturdy Bike Company makes the frames used to build its bicycles. During Year $2,$ Sturdy made $20,000$ frames; the costs incurred follow.

Unit$-$level materials costs $(20,000$ units $$ $$35\mathrm{.}00)$$ $700,000$Unit$-$level labor costs $(20,000$ units $$ $$42\mathrm{.}50)850,000$Unit$-$level overhead costs $(20,000$ $$10\mathrm{.}00)200,000$Depreciation on manufacturing equipment$120,000$Bike frame production supervisor$$s salary$70,000$Inventory holding costs$290,000$Allocated portion of facility$-$level costs$500,000$Total costs$ $2,730,000$

Sturdy has an opportunity to purchase frames for $$92\mathrm{.}50$ each.

Additional Information

The manufacturing equipment, which originally cost $$550,000,$ has a book value of $$450,000,$ 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 $$70,000$ per year.

Sturdy has the opportunity to purchase for $$910,000$ new manufacturing equipment that will have an expected useful life of four years and a salvage value of $$70,000.$ This equipment will increase productivity substantially, reducing unit$-$level labor costs by $60$ percent. Assume that Sturdy will continue to produce and sell $20,000$ frames per year in the future.

If Sturdy outsources the frames, the company can eliminate $80$ percent of the inventory holding costs.

Required

Determine the avoidable cost per unit of making the bike frames, assuming that Sturdy 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 Sturdy outsource the bike frames?

Assuming that Sturdy 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.

Assuming that Sturdy is considering whether to purchase the new equipment or outsource the bike frame, calculate the impact on profitability between the two alternatives.