Willing to give lifesaver for help!!!! Holcombe Bike Company (HBC) makes the fra

Question

Willing to give lifesaver for help!!!!
Holcombe Bike Company (HBC) makes the frames used to build its bicycles. During 2007, HBC made 20,000 frames, the cost incurred follow.
Unit-level materials costs (20,000 units x $40) $800,000
Unit-level labor costs (20,000 units x $51) $1,020,000
Unit-level overhead costs (20,000 x $9) 180,000
Depreciation on manufacturing equipment 90,000
Bike frame production supervisiors salary 70,000
Inventory holding cost 290,000
Total Cost 2,950,000
HBC has an opportunity to purchase frames for $100 each.
Additional information
1. 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.
2. HBC has the opportunity to purchase for $910,000 new manufacturing equipment that will have an expected useful life of four years an a salvage value of 70,000. This equipment will increase productivity substantially, reducing unit-level labor costs by 60 percent. Assume that HBC will continue to produce and sell 20,000 frames per year in the future.
3. If HBC outsources the frames, the company can eliminate 80 percent of the inventory holding costs.
Required
a. Determine the avoidable cost per unit of making the bike frames, assuming that HBC 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 HBC outsource the bike frames?
b. Assuming that HBC 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 impact on profitability if the bike frames were made using the old equipment versus the new equipment.
c. Assuming that HBC is considering whether to either purchase the new equipment or outsource the bike frame, calculate the impact on profitablity between the two alternatives.
d. Discuss the qualitative factors that HBC should consider before making a decisio to outsource the bike frame. How can HBC minimize the risk of establishing a relationship with an unreliable supplier?

Explanation / Answer

Incremental cost analysis

Particulars

Cost of making

Cost of buying

Incremental cost

20,000 frames

20,000 frames

(savings)

Incremental cost analysis

Particulars

Cost of making

Cost of buying

Incremental cost

20,000 frames

20,000 frames

(savings)

Variable costs: $ $ $ Direct material 800,000 800,000 Direct labor 1,020,000 1,020,000 Variable overhead 180,000 180,000 Total variable cost 2,000,000 2,000,000 Fixed costs: Depreciation on equipment 90,000 90,000 0 Salaries 70,000 0 70,000 Inventory holding costs 290,000 58,000 232,000 Total fixed costs 450,000 148,000 302,000 Cost of buying frames (20,000 x 100) 0 2,000,000 2,000,000 Total 2,450,000 2,296,000 154,000

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