Question

King City Specialty bikes (KCSB) produces high-end bikes. Costs to manufacture and market the bikes at last years’ volume level of 2,200 bikes per month are shown in the following table:

Variable Manufacturing per unit	$227.00
Total fixed Manufacturing	$290,400
Variable non-Manufacturing per unit	$65.00
Total fixed manufacturing	$308,000

KCSB expect to produce and sell 2500 bicycles per month in the coming year the bicycles sell for $620 each.

An outside contractor makes an offer to assemble 750 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 non-manufacturing cost of those 750 bicycles would be cut by 60% in addition, It would be able to save $29,040 of fixed manufacturing costs fixed non-manufacturing cost would be unchanged

KCSB’s marketing manager thinks that it would sell 75 specialty racing bicycles per month for $6500 each and his production manager thinks that it could use the idle resources to produce each of the bicycles for very variable manufacturing cost of $5300 per bicycle and variable non-manufacturing cost of $250 for a bicycle

Required [Note: Round unit cost computation to the nearest cent]

What is the difference in KCS be monthly cost between excepting the proposal and rejecting the proposal?

(Note: if the cost of excepting the proposal or less than the cost of rejecting it enter the difference as a positive number if that except cost her more than the reject cost enter the difference as a negative number.)

Answer 1

Unit variable manufacturing cost for the 750 bicycles = $227 x (1 - 0.30) = $158.90

Unit variable non-manufacturing cost for the 750 bicycles = $65 x (1 - 0.60) = $26

Savings in fixed manufacturing costs = $29,040

Determine the effect of accepting the proposal on total monthly costs.

Particulars		Reject Proposal (in $)		Accept proposal (in $)	Effect of accepting the proposal (in $)
Manufacturing costs:
Variable	$227 x 2,500	567,500	($227 x 1750) + ($158.90 x 750)	516,425	51,075
Fixed		290,400	$290,400 - $29040	261,360	14,145
Total manufacturing costs (a)		857,900		777,785	80,115
Non-manufacturing costs:
Variable	$65 x 2,500	162,500	($65*1750)+($26*750)	133250	29,250
Fixed		308,000		308,000	0
Total non-manufacturing costs (b)		470,500		441,250	29,250
Total manufacturing and non-manufacturing costs (a +b)		1,328,400		1,219,035	109,365
Add: Contractors price		0	$150 x 750	112500	-112500
Less: Additional earnings from specialty racing bicycles		0	($6500 - $5300 - $250) x 75	71250	71250
Total costs		1,328,400		1,402,785	68,115

Thus, if KCSB accepts the offer, it will be able to save $68,115 in monthly costs.