Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,800 bicycles per month are shown in the following table:

Variable manufacturing per unit	$223.00
Total fixed manufacturing	$212,400
Variable nonmanufacturing per unit	$54.00
Total fixed nonmanufacturing	$241,200

KCSB expects to produce and sell 2,100 bicycles per month in the coming year. The bicycles sell for $640 each.

An outside contractor makes an offer to assemble 750 of KCSB's bicycles per month and ship them directly to KCSB's customers as orders are received from its sales force. It will charge KCSB $170 per bicycle. KCSB would provide the materials for each bicycle, but the outside contractor would assemble, box, and ship the bicycles. If KCSB accepts the offer, its variable manufacturing costs would be reduced by 40% for the 750 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for those 750 bicycles would be cut by 55%. In addition, it would be able to save $10,620 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

KCSB's marketing manager thinks that it could sell 85 specialty racing bicycles per month for $6,000 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,900 per bicycle and variable nonmanufacturing costs of $250 per bicycle.

REQUIRED [Note: Round unit cost computations to the nearest cent]

What is the difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal?   (Note: If the costs of accepting the proposal are less than the costs of rejecting it, enter the difference as a positive number; if the accept costs are more than the reject costs, enter the difference as a negative number.)

Answer 1

Answer:

Cost of accepting proposal = Purchase cost - (Saving in variable manufacturing costs + Saving in variable non-manufacturing costs + Saving in fixed manufacturing costs)

= 750 * 170 - (750 * 223 * 40% + 750 * 54 * 55% + 10620)

= $27,705

Cost of rejecting proposal = Contribution from sale of specialty racing bicycles per month

= ((6000 - (4900 + 250)) * 85

= $72,250

Difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal = 72250 - 27705 =$44,545

Difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal = $44,545