Question

I've completed all but the below requirement (B-1). If you could please explain how you received this answer. Thanks!

King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at the company's volume of 2,000 units per month are shown in the following table. $240 120 $360 Unit manufacturing costs Variable costs Fixed overhead Total unit manufacturing costs Unit nonmanufacturing costs Variable Fixed Total unit nonmanufacturing costs Total unit costs 60 200 $ 560 The company has the capacity to produce 2,000 units per month and always operates at full capacity. The bicycles sell for $600 per unit.

Answer 1

In-house cost to be compared is equal to the avoidable cost per unit
Unit Manufacturing cost
Variable	96
Fixed	60
Unit non manufacturing cost
Variable	36
Fixed	0
Avoidable unit cost	192
a-2. Yes, since the in-house cost is more
b-1 Maximum price to be paid is equal to the costs avoided + contribution margin from specialty bicycles
=96+36+(8000-5600-200)*80/800
=$352 per unit
b-2 Yes