Vernon Bike Company makes the frames used to build its bicycles. During Year 2, Vernon made 22,000 frames; the costs incurred follow. Unit - level materials costs (22,000 units \times $48) $ 1,056, 000 Unit - level labor costs (22,000 units \times $53) 1, 166,000 Unit - level overhead costs (22,000 \times $ 12) 264,000 Depreciation on manufacturing equipment 99,000 Bike frame production supervisor's salary 75, 800 Inventory holding costs 289,000 Allocated portion of facility - level costs 580,000 Total costs $ 3,529,800 Vernon has an opportunity to purchase frames for $110 each. Additional Information The manufacturing equipment, which originally cost $500,000, 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 $78, 000 per year. Vernon has the opportunity to purchase for $960,000 new manufacturing equipment that will have an expected useful life of four years and a salvage value of $64,000. This equipment will increase productivity substantially, reducing unit - level labor costs by 70 percent. Assume that Vernon will continue to produce and sell 22,000 frames per year in the future. If Vernon 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 Vernon 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 Vernon outsource the bike frames? Assuming that Vernon 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 Vernon is considering whether to purchase the new equipment or outsource the bike frame, calculate the impact on profitability between the two alternatives. ?

Vernon Bike Company makes the frames used to build its bicycles. During Year 2, Vernon made 22,000 frames; the costs incurred follow. Unit - level materials costs (22,000 units \times $48) $ 1,056, 000 Unit - level labor costs (22,000 units \times $53) 1, 166,000 Unit - level overhead costs (22,000 \times $ 12) 264,000 Depreciation on manufacturing equipment 99,000 Bike frame production supervisor's salary 75, 800 Inventory holding costs 289,000 Allocated portion of facility - level costs 580,000 Total costs $ 3,529,800 Vernon has an opportunity to purchase frames for $110 each. Additional Information The manufacturing equipment, which originally cost $500,000, 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 $78, 000 per year. Vernon has the opportunity to purchase for $960,000 new manufacturing equipment that will have an expected useful life of four years and a salvage value of $64,000. This equipment will increase productivity substantially, reducing unit - level labor costs by 70 percent. Assume that Vernon will continue to produce and sell 22,000 frames per year in the future. If Vernon 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 Vernon 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 Vernon outsource the bike frames? Assuming that Vernon 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 Vernon is considering whether to purchase the new equipment or outsource the bike frame, calculate the impact on profitability between the two alternatives. ?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter12: Activity-based Management

Section: Chapter Questions

Problem 22E: The activity of moving materials uses four forklifts, each leased for 18,000 per year. A forklift is...

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