Question

King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at the company's volume of 2,000 units per month are shown in the following table. $240 120 $360 Unit manufacturing costs Variable costs Fixed overhead Total unit manufacturing costs Unit nonmanufacturing costs Variable Fixed Total unit nonmanufacturing costs Total unit costs 60 140 200 $560 The company has the capacity to produce 2,000 units per month and always operates at full capacity. The bicycles sell for $600 per unit. Required: a. KCSB receives a proposal from an outside contractor who will assemble 800 of the 2,000 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 40 percent for the 800 bicycles assembled by the outside contractor. KCSB's fixed nonmanufacturing costs would be unaffected, but its variable nonmanufacturing costs would be cut by 60 percent for these 800 units produced by the outside contractor KCSB's plant would operate at 60 percent of its normal level, and total fixed manufacturing costs would be cut by 20 percent. 1. What in-house unit cost should be compared with the quotation received from the outside contractor Assume the payment to me outside contractor is $140. a-2. Should the proposal be accepted for a price (that is, payment to the contractor) of $140 per unit? b. Assume the same facts as in requirement (a) but assume that the idle facilities would be used to produce 80 specialty racing bicycles per month. These racing bicycles could be sold for $8,000 each, while the costs of production would be $5,600 per unit variable manufacturing cost. Variable marketing costs would be $200 per unit. Fixed nonmanufacturing and manufacturing costs would be unchanged whether the original 2,000 regular bicycles were manufactured or the mix of 1.200 regular bicycles plus 80 racing bicycles was produced. b-1. Considering this opportunity to use the freed-up space, what is the maximum purchase price per unit that KCSB should be willing to pay the outside contractor to assemble regular bicycles? b-2. Should the contractor's proposal of $140 per unit be accepted?

Answer 1

Bicycles
In-house cost to be compared is equal to the avoidable cost per unit
Unit Mnaufacturing cost
Variable	96
Fixed	60
Unit non manufacturing cost
Variable	36
Fixed	0
Avoidable unit cost	192
a-2. Yes, since the in-house cost is more
b-1 Maximum price to be paid is equal to the costs avoided + contribution margin from specialty bicycles
=96+36+(8000-5600-200)*80/800
=$352 per unit
b-2 Yes