Make sure you understand the two alternatives. The "make" means that KCSB makes, assembles, and ships all of its bicycles. The "buy" means that KCSB
makes, assembles, and ships some of its bicycles,
makes some of its bicycles and pays another firm to assemble and ship them, and
uses idle resources to make and sell specialty racing bicycles
______________________________________________________
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 | $258.00 |
Total fixed manufacturing | $272,650 |
Variable nonmanufacturing per unit | $59.00 |
Total fixed nonmanufacturing | $282,900 |
KCSB expects to produce and sell 2,250 bicycles per month in the coming year. The bicycles sell for $650 each.
KCSB receives a proposal from an outside contractor who, for $155 per bicycle, will assemble 800 bicycles per month and ship them directly to KCSB's customers as orders are received from KCSB's sales force. KCSB would provide the materials for each bicycle, but the outside contractor would assemble, box, and ship the bicycles. The variable manufacturing costs would be reduced by 35% for the 800 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 800 bicycles would be cut by 60%.
KCSB's marketing manager thinks that it could sell 70 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 $450 per bicycle.
If KCSB accepts the proposal, it would be able to save 10% 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: _________
Solution:
Comparative Analysis of monthly cost of accepting and rejecting the proposal of assembling | |||
Particulars | Alt 1 - Accept assembly propsal | Alt 2 - Reject assembly propsal | Differential effect (Alt 1) |
Total assembling charges to be taken by outside contractor (800*$155) | $124,000.00 | $0.00 | -$124,000.00 |
Variable manufacturing
cost Alt 1 - 258*65%*800 Alt 2 = 258*800 |
$134,160.00 | $206,400.00 | $72,240.00 |
Variable nonmanufacturing
cost Alt 1 - 59*40%*800 Alt 2 = 59*800 |
$18,880.00 | $47,200.00 | $28,320.00 |
Reduction in Fixed Manufacturing cost ($272650*10%) | -$27,265.00 | $27,265.00 | |
$0.00 | |||
Contribution from sale of
special racing bicycle on acceptance of proposal ($6,500 - $5,500 - $450)*70 |
-$38,500.00 | $0.00 | $38,500.00 |
$0.00 | |||
Net monthly cost of each alternative | $211,275.00 | $253,600.00 | $42,325.00 |
Hence difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal si $42,325
Make sure you understand the two alternatives. The "make" means that KCSB makes, assembles, and ships...
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....
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....
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...
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...
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)...
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 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...
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...
King City Specialty Bikes (KCSB) produces high-end bicycles.
Costs to manufacture and market the bicycles at last year's volume
level of 1,800 bicycles per month are shown in the following table:
Variable manufacturing per unit $248.00 Total fixed manufacturing
$232,200 Variable nonmanufacturing per unit $54.00 Total fixed
nonmanufacturing $262,800 KCSB expects to produce and sell 2,100
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...
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$58.00 per unit Total fixed nonmanufacturing $226.00 $249,750 $277,500 KCSB expects to produce and sell 2,200 bicycles per month in the coming year. The bicycles sell for $650 each KCSB receives a proposal from an outside contractor who, for $165 per...