Question

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 make and sell specialty racing bicycles.

TIP: The analysis can be simplified by ignoring all irrelevant tiems - the revenue and the costs for the bicycles that are not being outsourced. Instead, just focus on 1) the make versus buy costs of the outsourced bikes, and 2) the contribution margin of the specialty racing bikes.

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,900 bicycles per month are shown in the following table:

Variable manufacturing per unit	$225.00
Total fixed manufacturing	$212,800
Variable nonmanufacturing per unit	$59.00
Total fixed nonmanufacturing	$247,000

KCSB expects to produce and sell 2,250 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 $165 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 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 $21,280 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 $6,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $5,400 per bicycle and variable nonmanufacturing costs of $400 per bicycle.

Round unit computations to the nearest cent. !!

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.

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

This is the question that needs to be answered ^^

Answer 1

Answer with working notes is given below

Evaluation of Make vs. Buy Make $168,750 $44,250 Purchase cost Variable manufacturing Variable nonmanufacturing Fixed manufacturing cost savings Total Opportunity Cost-See working below Total Cost Total units Unit cost $213,000 $56,000 $269,000 750 $358.67 Buy Differential Working $123,750 -$123,750 (750*$165) $92,813 $75,938 see working below $19,913 $24,338 see working below -$21,280 $21,280 $21,280 savings $215,195 -$2,195 $56,000 Contribution forgone if not outsourced $215,195 $53,805 750 $286.93 $71.74 Conclusion: Outside contractor proposal should be accepted due to lower costs Total savings in Outsourcing $53,805 working notes Variable manufacturing (750 *$225) Variable nonmanufacturing (750 *$59) Make | $168,750 $44,250 Buy Comments $92,813 45% less $19,913 55% less (750*$225) *55% (750*$59) *45% Fixed manufacturing cost is non relevant since no changes in the cost $6,500 Additional contribution-Speciality bikes selling price Less: Variable cost variable manufacturing cost variable nonmanufacturing costs Contribution per unit Total units Total Contribution $5,400 $400 $5,800 $700 80 $56,000