Question

What is the difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal?

Make sure you understand the two alternatives. • The "make" means that KCSB assembles and ships all of its regular bicycles. • The "buy" means that KCSB pays another firm to assemble and ship some of its regular bicycles and uses the freed-up resources to assemble and ship specialty racing bicycles. • TIP: Ignore revenues from regular bike sales - they will be the same under both alternatives and are therefore common costs that can be ignored. King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,200 bicycles per month are shown in the following table: $233.00 $286,000 Variable manufacturing per unit Total fixed manufacturing Variable nonmanufacturing per unit Total fixed nonmanufacturing $64.00 $314,600 KCSB expects to produce and sell 2,400 bicycles per month in the coming year. The bicycles sell for $580 each. An outside contractor makes an offer to assemble 900 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 $155 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 45% for the 900 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for those 900 bicycles would be cut by 60%. 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 $4,800 per bicycle and variable nonmanufacturing costs of $300 per bicycle. If KCSB accepts the proposal, it would be able to save $14,300 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged. 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

If accepts Offer DIFFERENCE Calculation of Costs Particulars Variable Costs Manufacturing Costs Non Manufacturing Costs Contractors Fee Total Variable Costs Fixed Costs Manufacturing Costs Non Manufacturing Costs Total Fixed Costs TOTAL COSTS If Rejects Offer Calculation Amount =2400 x 233 = 559200 =2400 x 64 = 153600 0 1 712800 464835 119040 139500 723375 94365 34560 -139500 -10575 286000(Given) 314600(Given) 600600 1313400 271700 (Note 3) 314600 (Given) 586300 1309675 14300 0 14300 3725 Total Costs COSTS IF ACCEPTS THE OFFER Particulars Cost 900 Cycles Cost 1500 Cycles Variable Costs Calculation L Amount Manufacturing Costs =900 x 128.15 = 115335 =1500*233 =349500 Non Manufacturing Costs =900 x 25.6 = 23040 =1500*64 -96000 Contractors Fee =900x155(Note 4)= 139500 Total Variable Costs 277875 445500 So,monthly difference costs for accepting and rejecting proposal is = Total costs of Rejecting proposal-Total costs of accepting proposal = 1313400-1309675 = 3725 464835 119040 139500 723375

NOTES 1 Manufacturing Variable costs Decreaes by 45% for the 900 bycyles if offer is accepted. So, Variable Manufacturing cost per unit shall be = 233(100%-45%) = 128.15 2 Non Manufacturing Variable Costs Decreases by 60% for 900 Bycycles if accepted So, Variable non Manufacturing Cost per unit shall be = 64 x (100%-60%) = 25.6 3 If offer is accepted the manufacturing fixed cost decreases by 14300 So, the Manufacturing fixed costs after acceptance of proposal are = 286000-14300 = 271700 4 If proposal is accepted then the contractor would charge $ 155 per Bicycle So, the Contractors Fee for assembling is = 900 x 155 139500

If proposal is accepted then 900 Bicyles would be sold by contractors then the remaining bycyles to be manufactured by KCSB are

=2500-900=1500

The variable costs of these 1500 bicycles would be same as that of not accepting the offer as per question