Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,000 bicycles per month are shown in the following table:

Variable manufacturing per unit	$253.00
Total fixed manufacturing	$228,000
Variable nonmanufacturing per unit	$63.00
Total fixed nonmanufacturing	$278,000

KCSB expects to produce and sell 2,400 bicycles per month in the coming year. The bicycles sell for $600 each.

An outside contractor makes an offer to assemble 700 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 $150 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 30% for the 700 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for th0se 700 bicycles would be cut by 60%.

KCSB's marketing manager thinks that it could sell 70 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 $22,800 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

1	If the offers rejected by the KCSB the the sales, cost and profit would be as follows
	Sales of Basic bicycle
	Sales		1440000
	Less:
	Varible manufacturing cost	607200
	(253*2400)
	Total fixed manufacturing cost	228000
	(remain unchanged)
	Varible non manufacturing cost	151200
	(63*2400)
	Total fixed non manufacturing cost	278000	1264400
	(remain unchanged)
	Profit		175600
2	If the offers accepted by the KCSB the the sales, cost and profit would be as follows
	Sales of Basic bicycle and special cycle
	Sales of Basic bicycle		1440000
	Sales of special cycle		420000
	Less:
	Varible manufacturing cost	554070
	(253*2400-253*30%*700)
	Total fixed manufacturing cost	205200
	(remain unchanged)
	Varible non manufacturing cost	124740
	(63*2400-63*60%*700)
	Total fixed non manufacturing cost	278000
	(remain unchanged)
	Cost to outside vendor	105000	1267010
	(150*700)
	Special Cycle variable manufacturing cost		336000
	(4800*70)
	Special Cycle variable non manufacturing cost		21000
	(300*70)
	Profit		235990
	Profit would be increase by		60390
	if the accepted the offer