Sturdy has an opportunity to purchase frames for $115 each.

Additional Information

1. The manufacturing equipment, which originally cost $570,000, has a book value of $420,000, a remaining useful life of five years, and a zero salvage value. If the equipment is not used to produce bicycle frames, it can be leased for $73,000 per year.

2. Sturdy has the opportunity to purchase for $960,000 new manufacturing equipment that will have an expected useful life of five years and a salvage value of $77,500. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that Sturdy will continue to produce and sell 23,000 frames per year in the future.

3. If Sturdy outsources the frames, the company can eliminate 70 percent of the inventory holding costs.

Required

1. 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?

2. 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.

3. Assuming that Sturdy is considering whether to either purchase the new equipment or outsource the bike frame, calculate.