Question

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.

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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 2,100 bicycles per month are shown in the following table:

Variable manufacturing per unit	$258.00
Total fixed manufacturing	$291,900
Variable nonmanufacturing per unit	$51.00
Total fixed nonmanufacturing	$287,700

KCSB expects to produce and sell 2,500 bicycles per month in the coming year. The bicycles sell for $580 each.

KCSB receives a proposal from an outside contractor who, for $170 per bicycle, will assemble 750 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 30% for the 750 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 750 bicycles would be cut by 55%.

KCSB's marketing manager thinks that it could sell 80 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 $5,000 per bicycle and variable nonmanufacturing costs of $450 per bicycle.

If KCSB accepts the proposal, it would be able to save $14,595 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

Your answer is	10,182.50
	Option 1	Option 2		Option 3
	MAKE	MAKE & BUY		special bike
BIKES	2500	750	1750	80
Variable mfr cost	$                258.00	$          180.60	$          258.00	5000
total variable mfr cost	$       645,000.00	$ 135,450.00	$ 451,500.00	$ 400,000.00
Variable non mfr cost	$                  51.00	$            22.95	$            51.00	450
total variable non mfr cost	$       127,500.00	$    17,212.50	$    89,250.00	$    36,000.00
Purchase price		$ 127,500.00
750*170
Fixed mfr cost	$       291,900.00	$                               277,305.00
fixed non mfr cost	$       287,700.00	$                               287,700.00
total costs	$    1,352,100.00	$                           1,385,917.50
less:sales
80*6000				$ 480,000.00
oportunity cost				$    44,000.00
234000-23400=	277,305.00
60*(100%-55%)	22.95
so we have
option 1	$    1,352,100.00
option 2	$ (1,385,917.50)
option 3	$          44,000.00
difference in monthly costs	$          10,182.50