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Gibson Bike Company makes the frames used to build its bicycles. During year 2, Gibson made 22,000 frames; the costs incurred follow.

Unit-level materials costs (22,000 units $53)	$	1,166,000
Unit-level labor costs (22,000 units $55)		1,210,000
Unit-level overhead costs (22,000 $12)		264,000
Depreciation on manufacturing equipment		99,000
Bike frame production supervisors salary		62,800
Inventory holding costs		340,000
Allocated portion of facility-level costs		540,000
Total costs	$	3,681,800

Gibson has an opportunity to purchase frames for $125 each. Additional Information

The manufacturing equipment, which originally cost $510,000, has a book value of $460,000, a remaining useful life of 4 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.

Gibson has the opportunity to purchase for $970,000 new manufacturing equipment that will have an expected useful life of 4 years and a salvage value of $65,200. This equipment will increase productivity substantially, reducing unit-level labor costs by 50 percent. Assume that Gibson will continue to produce and sell 22,000 frames per year in the future.

If Gibson 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 Gibson 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 Gibson outsource the bike frames?

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

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