Question

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 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.

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King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,050 bicycles per month are shown in the following table:

Variable manufacturing per unit	$232.00
Total fixed manufacturing	$266,500
Variable nonmanufacturing per unit	$68.00
Total fixed nonmanufacturing	$276,750

KCSB expects to produce and sell 2,350 bicycles per month in the coming year. The bicycles sell for $630 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 $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 30% for the 700 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for those 700 bicycles would be cut by 60%. In addition, it would be able to save $26,650 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

KCSB's marketing manager thinks that it could sell 75 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 $5,500 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

Table showing costs in each case

	accept	reject
units produced	1650	2350
buy	700	0
cost of production
variable manufacturing cost	$382800	$545200
total fixed manufacturing	$239850	$266500
variable non manufacturing cost	$112200	$159800
total fixed non manufacturing	$276750	$276750
cost of production	$1011600	$1248250
cost in case of buy(for 700units only)
cost of purchase	$108500
variable manufacturing cost	$113680
variable non manufacturing cost	$19040
cost of buy	$241220
total cost	$1252820	$1248250

Difference = reject-accept

=$1248250 - $1252820

= $4570

As cost of accepting is more than rejection. Company should reject the proposal of buy.