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: $243.00 Variable manufacturing per unit Total fixed manufacturing Variable nonmanufacturing per unit Total fixed nonmanufacturing $226,800 $50.00 $264,600 KCSB expects to produce and sell 2,200 bicycles per month in the coming year. The bicycles sell for $630 each.

KCSB expects to produce and sell 2,200 bicycles per month in the coming year. The bicycles sell for $630 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 $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 35% for the 750 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for those 750 bicycles would be cut by 60%. In addition, it would be able to save $11,340 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

KCSB's marketing manager thinks that it could sell 80 specialty racing bicycles per month for $5,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,400 per bicycle and variable nonmanufacturing costs of $300 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

Statement showing below in attachment

All cost which is not considered in statement will remain same , so we will not consider then while calculating the difference in KCSB's Monthly cost

Costing For accepting The proposal Particulars QTY cost per qty Total Amt ($) Variable cost manufacturing 1 overhead 157.95 118462.5 Variable non manufacturing 2 Overhead 20 15000 Contractor 3 Additional cost 155 116250 Costing for Rejecting the proposal Particulars QTY cost per qty Total Amt ($) Variable cost manufacturing 1 overhead 243 182250 Variable non manufacturing 2 Overhead 750 750 50 37500 Total Variable cost Total Variable cost 332.95 249712.5 750 293 219750 Add opportunity cost of speciality bicycles ** Less saving in fixed cost -11340 80 800 64000 Total Cost of accepting the proposal Total Cost of rejecting the proposal 238372.5 283750

so The difference in KCSB's monthly cost  between accepting the proposal and rejecting the proposal is $ 45377.5 (Total Cost of accepting the proposal -Total Cost of rejecting the proposal)

** if we reject the proposal then, the profit which can be earned by making specility bicycle will be lost, which in costing called opportunity cost. 5500 sale price Less variable manufacturi ng cost Less variable manufacturi ng cost -4400 -300 opportunity cost 800

(238372.5 -283750)