Question

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 $223.00 $233,100 $66.00 $240,500 KCSB expects to produce and sell 2,200 bicycles per month in the coming year. The bicycles sell for $610 each. An outside contractor makes an offer to assemble 750 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 30% for the 750 bicycles assembled by the outside contractor, and its variable nonmanufacturing costs for those 750 bicycles would be cut by 60%. In addition, it would be able to save $11,655 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged. KCSB's marketing manager thinks that it could sell 85 specialty racing bicycles per month for $6,000 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,900 per bicycle and variable nonmanufacturing costs of $400 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

		IF OROPOSAL IS ACCEPTED:
		Variable Cost for (2200-750)=1450 Units
	a	Variable manufacturing cost	$323,350	(1450*223)
	b	Variable Non Manufacturing Cost	$95,700	(1450*66)
	c=a+b	Total Variable Cost for 1450 units	$419,050
		Variable Cost for 750 Units:
	d	Variable manufacturing cost	$117,075	(1-0.3)*750*223
	e	Variable Non Manufacturing Cost	$19,800	(1-0.6)*750*66)
	f	Variable Purchase cost	$112,500	(750*150)
	g=d+e+f	Variable Costs for 750 units	$249,375
	h=c+g	Total Variable Cost for 2200units	$668,425
		FIXED COSTS:
	i	Fixed manufacturing cost	$221,445	(233100-11655)
	j	Fixed non manufacturing Costs	$240,500
	k=i+j	Total fixed costs for 2200 units	$461,945
		ADDITIONAL CONTRIBUTION FROM SPECIALITY RACING CYCLES
	l	Selling Price	$6,000
	m	Variable Manufacturing cost per unit	$4,900
	n	Variable non Manufacturing cost per unit	$400
	p=l-m-n	Unit contribution	$700
	q=p*85	Total additional contribution	$59,500
	X=h+k-q	NET COST IF PROPOSAL IS ACCEPTED	$1,070,870
		IF OROPOSAL IS REJECTED:
		VARIABLE COSTS:
	a	Variable manufacturing cost	$490,600	(2200*223)
	b	Variable Non Manufacturing Cost	$145,200	(2200*66)
	c=a+b	Total Variable Cost	$635,800
		FIXED COSTS:
	d	Fixed manufacturing cost	$233,100
	e	Fixed non manufacturing Costs	$240,500
	f=d+e	Total fixed costs for 2200 units	$473,600
	Y=c+f	NET COST IF PROPOSAL IS REJECTED	$1,109,400
	X=Y-X	Difference in KCSB's monthly cost between accepting and rejecting	$38,530