Question

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:

Variable manufacturing per unit	$221.00
Total fixed manufacturing	$239,800
Variable nonmanufacturing per unit	$59.00
Total fixed nonmanufacturing	$301,400

KCSB expects to produce and sell 2,400 bicycles per month in the coming year. The bicycles sell for $590 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 $160 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 900 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for th0se 900 bicycles would be cut by 55%.

KCSB's marketing manager thinks that it could sell 85 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 $4,500 per bicycle and variable nonmanufacturing costs of $450 per bicycle.

If KCSB accepts the proposal, it would be able to save $11,990 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

Non Manufacturing cost (Varible or fixed) is not part of production cost. However for decision making we shall consider only when it has financial impact.

Here there is saving in non manufacturing cost, which shall be considered while comparing cost benifit analysis against outsourcing

Following table containing the calculation at different senarios :

Existing cost when manufactures at own
	Particulars	UOM	Price PU ($)
A	Selling Price	Unit	590
	Variable Manufacturing Cost	Unit	221
	Saving Variable Non Manufacturing Cost	Unit
		Unit
	Variable Overhead	Unit
B	Marginal Cost PU		221
	Allocated Fixed Cost at present Capacity	Unit	100
C	Total Cost	Unit	321
D	Net Contribution	Unit	269

Saving in Outsourcing
	Particulars	UOM	Price PU ($)
A	Selling Price	Unit
	Saving in Variable Manufacturing Cost	Unit	66
	Saving Variable Non Manufacturing Cost	Unit	32
	Labour	Unit
	Variable Overhead	Unit
B	Marginal Cost PU		99
	Allocated Fixed Cost	Unit	100
C	Total Cost	Unit
D	Net Saving (-)	Unit	-                    99
E	Cost of Production by out sourcing	Units	270
	Net Contribution (Selling Price - E)		320

Utilisation of own resources by outsorcing
	Particulars	UOM	Price PU ($)
A	Selling Price of specialty racing bicycles	Unit	5,500
	Variable Manufacturing Cost	Unit	4,500
	Increase in Variable Non Manufacturing Cost	Unit	450
	Labour	Unit
	Variable Overhead	Unit
B	Marginal Cost PU		4,950
	Fixed Cost applicable for addional units	Unit	92
C	Total Cost	Unit	5,042
D	Net Contribution	Unit	458

Hence it is advisable to opt ousourcing & use the existing resources to produce racing cycles.