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

Scenario 1 :	Make	Amount
No oF units	No.	2,400.00
Selling Price/unit	$	580.00
Variable Cost
Manufactering/unit	$	233.00
Non Manufactering/Unit	$	64.00
Contribution/unit	$	283.00
Total Contribution	$	679,200.00
Fixed Cost
Manufactering	$	286,000.00
Non Manufactering	$	314,600.00
Total Profit	$	78,600.00
Scenario 2:	Buy	Amount
		Self Production	Job Work
No Of Units - Normal Bicycle	No.	1,500	900
Special Bicycle	No.	85
Selling Price/unit
Normal	$	580	580
Special Bicycle	$	6,000
Variable Cost
Manufactering/Unit - For 900 Job Work Units	$		128
For 1500 Unit Normal Bicycle	$	233
For Special Bicycle	$	4,800
Non Manufactering/Unit - For 900 Job Work Units	$		26
For 1500 Unit Normal Bicycle	$	64
For Special Bicycle	$	300
Job Work Charges/Unit	$		155
Contribution/Unit
900 Units Job Work	$		271
1500 Units Normal Bicycle	$	283
85 Units Special bicycle	$	900
Total Contribution	$	501,000	244,125
Fixed Cost
Fixed Manufactering Cost	$	271,700
Fixed Non Manufacering cost	$	314,600
Total Profit	$	158,825
As Scenario 2 i.e. job work is more profitable , it should accept the proposal.