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. 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 1,850 bicycles per month are shown in the following table: Variable manufacturing per unit Total fixed manufacturing Variable nonmanufacturing per unit Total fixed nonmanufacturing $241.00 $190,550 $67.00 $246,050 KCSB expects to produce and sell 2,050 bicycles per month in the coming year. The bicycles sell for $560 each. An outside contractor makes an offer to assemble 850 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 35% for the 850 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for those 850 bicycles would be cut by 60%. In addition, it would be able to save $9,528 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 $250 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.) Submit Answer Incorrect. Tries 4/8 Previous Trles

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Difference in monthly cost = relevant cost of rejecting the proposal - Relevant cost of purchase net of increased contribution margin of racing bicycle = ((((241*35%)+(67*60%))*850)+9528) - ((150*850)-((5500-4400-250) *80)) = (((84.35+40.2) *850)+9528)- (127500-68000) = $55895.5 Thus the final answer is $ 55895.5 Note we can also round off the final answer to 0 decimal point as per our requirement.