Question

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	$226.00
Total fixed manufacturing	$266,500
Variable nonmanufacturing per unit	$54.00
Total fixed nonmanufacturing	$282,900

KCSB expects to produce and sell 2,250 bicycles per month in the coming year. The bicycles sell for $610 each.

KCSB receives a proposal from an outside contractor who, for $160 per bicycle, will assemble 900 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 45% for the 900 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 900 bicycles would be cut by 60%.

KCSB's marketing manager thinks that it could sell 75 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 $450 per bicycle.

If KCSB accepts the proposal, it would be able to save $26,650 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

I have calculated total cost for by considering that a mix as per following

1350 units present bicycles produced by KCSB

900 units of bicycle will be got produced from the outside contractor

75 units of specialty racing bicycles will be produced by KCSB from idle capacity

So my cost comes to be for the above mix = $1127310

and if proposal is not accepted

The cost of producing 2250 bicycles will be = $1179400

so difference in Total cost is = $1179400- $1127310 = $52090

All detailed calculations are as following

A. Calculation of Total Cost for the month if proposal of outside contractor is not accepted

Cost of 2250 units if proposal is not accepted
	Rate per unit	Amount
Variable manufacturing	$                226	$            508,500
Variable non manufacturing	$                  54	$            121,500
Total fixed manufacturing		$            266,500
Total fixed non manufacturing		$            282,900
Overall Total Cost of production		$        1,179,400

B. Calculation of total cost of month if proposal of outside contractor is accepted

If proposal of outside contractor is accepted 900 units will be acquired from contractor, 1350 units will be produced By KCSB itself and 75 units of special racing cycle will also be produced by KCSB

here first of all variable cost of all units are calculated then total cost is calculated as following

Variable Cost of 1350 units if proposal from outside contractor is accepted
	Rate per unit	Units	Amount
Variable manufacturing	$                226	1350	$                    305,100
Variable non manufacturing	$                  54	1350	$                      72,900
			$                    378,000

For 900 Units got produced from outside contractor

Manufacturing Variable cost for 900 units = $226*55%(as it is reduced by 45%)

= $124.30

Non Manufacturing Variable cost for 900 units = $54*40%(as it is reduced by 60%)

= $21.60

Cost of assembly charged by Contractor per unit = $160

Variable Cost of 900 units Acquired from outside contractor if proposal is accepted
Variable manufacturing	$          124.30	900 Units	$                    111,870
Variable non manufacturing	$            21.60	900 Units	$                      19,440
Variable Cost of Assembling by contractor	$                160	900 Units	$                    144,000
			$                    275,310

Variable Cost of 75 units of Special Racing Cycle if proposal is accepted
Variable manufacturing	$            4,900	75	$                    367,500
Variable non manufacturing	$                450	75	$                      33,750
			$                    401,250

Now total cost of production for the month of producing all units including Fixed Manufacturing and Fixed Non Manufacturing cost will be as following

New total fixed manufacturing cos will be = $266500-$26650 =$239850

Fixed Non Manufacturing cost will remain same = $282900

Variable Cost of production 1350 units			$                    378,000
Variable Cost of 900 units Acquired from outside contractor			$                    275,310
Variable Cost of 75 units of Special Racing Cycle			$                    401,250
Total fixed manufacturing			$                    239,850
Total non fixed manufacturing			$                    282,900
Overall total cost of all units if Proposal of outside Contractor accepted			$                1,577,310

Revenue from producing specialty racing bicycle @$6000 for 75 units = $6000*75 = $450000  

Monthly cost if proposal is accepted after deducting revenue from Specialty racing bicycle = $1577310-$450000

$1127310

Monthly Total Cost of production if proposal of outside contractor is not accepted

$ 1,179,400

Monthly total cost of all units if Proposal accepted after deducting revenue from specialty bicycle

= $1127310

Difference in Total Monthly cost = $1179400-$1127310= $52090

FEEL FREE TO ASK ANY CLARIFICATION IF ANY REQUIRED KINDLY PROVIDE FEED BACK BY THUMBS UP IF SATISFIED IT WILL BE HIGHLY APPRECIATED

THANK YOU