Question

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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	$237.00
Total fixed manufacturing	$225,500
Variable nonmanufacturing per unit	$64.00
Total fixed nonmanufacturing	$287,000

KCSB expects to produce and sell 2,450 bicycles per month in the coming year. The bicycles sell for $590 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 $170 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 40% 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 $22,550 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 $6,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $5,300 per bicycle and variable nonmanufacturing costs of $300 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

	Particulars	Present situation		If Assembly is accepted
			Accepting the proposal	Manufacture	Assemble	Specialty racing bicycle
	A	B	C=D+E+F	D	E	F
	Sales Price per unit	590.00		590.00	590.00	6,500.00
	variable manufacturing cost	237.00		237.00	142.20	5,300.00
	variable non-manufacturing cost	64.00		64.00	25.60	300.00
	Cost of assembly				170.00
	contribution margin per unit	289.00		289.00	252.20	900.00
	No of units	2,450.00		1,700.00	750.00	85.00
	contribution margin in value	708,050.00	756,950.00	491,300.00	189,150.00	76,500.00
	Total fixed manufacturing cost	225,500.00	202,950.00	225,500.00	(22,550.00)
	Total fixed non manufacturing cost	287,000.00	287,000.00	287,000.00
	Net operating income	195,550.00	267,000.00	(21,200.00)	211,700.00	76,500.00
	Benefit of accepting the offer is $ 267,000 (i.e. (21,200)+211,700+76,500
	Note:- in case of production of specialty racing bicycle there will not be any fixed cost it is already recovered from production from normal bicycle