Reference no: EM133927146

Problem

Outsourcing decision affected by equipment replacement. Franklin Bike Company makes the frames used to build its bicycles. During Year 2, Franklin made 23,000 frames; the costs incurred follow. Unit-level materials costs (23,000 units × $50) $ 1,150,000 Unit-level labor costs (23,000 units × $54) 1,242,000 Unit-level overhead costs (23,000 × $15) 345,000 Depreciation on manufacturing equipment 98,000 Bike frame production supervisor's salary 79,500 Inventory holding costs 360,000 Allocated portion of facility-level costs 570,000 Total costs $ 3,844,500 Franklin has an opportunity to purchase frames for $114 each. Additional Information The manufacturing equipment, which originally cost $520,000, 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 $71,000 per year. Franklin has the opportunity to purchase for $940,000 new manufacturing equipment that will have an expected useful life of four years and a salvage value of $76,400. This equipment will increase productivity substantially, reducing unit-level labor costs by 70 percent. Assume that Franklin will continue to produce and sell 23,000 frames per year in the future. If Franklin outsources the frames, the company can eliminate 70 percent of the inventory holding costs. Get the instant assignment help. Determine the avoidable cost per unit of making the bike frames, assuming that Franklin is.