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 make and sell specialty racing bicycles.
• TIP: The analysis can be simplified by ignoring all irrelevant tiems - the revenue and the costs for the bicycles that are not being outsourced. Instead, just focus on 1) the make versus buy costs of the outsourced bikes, and 2) the contribution margin of the specialty racing bikes.

______________________________________________________

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	$258.00
Total fixed manufacturing	$282,900
Variable nonmanufacturing per unit	$60.00
Total fixed nonmanufacturing	$293,150

KCSB expects to produce and sell 2,300 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 $160 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 35% 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 $14,145 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

KCSB's marketing manager thinks that it could sell 90 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 $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

Unit variable manufacturing cost for the 750 bicycles = $258 x (1 - 0.35) = $167.70

Unit variable non-manufacturing cost for the 750 bicycles = $60 x (1 - 0.60) = $24.00

Savings in fixed manufacturing costs = $14,145

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

		Reject Proposal (in $)		Accept proposal (in $)	Effect of accepting the proposal (Reject - Accept)(in $)
Manufacturing costs:
Variable	$258 x 2,300	593,400	($258 x 1550) + ($167.70 x 750)	525,675	67,725
Fixed		282,900	$282,900 -$14145	268,755	14,145
Total manufacturing costs (a)		876,300		794,430	81,870
Non-manufacturing costs:
Variable	$60 x 2,300	138,000	($60 x 1550) + ($24 x 750)	111,000	27,000
Fixed		293,150		293,150	0
Total non-manufacturing costs (b)		431,150		404,150	27,000
Total manufacturing and non-manufacturing costs (a +b)		1,307,450		1,198,580	108,870
Add: Contractors price		0	$160 x 750	120,000	-120,000
Less: Additional earnings from specialty racing bicycles		0	($6000 - $4900 - $300) x 90	72,000	72,000
Total costs		1,307,450		1,390,580	60,870

Thus, if King City accepts the offer, it will be able to save $60,870 in monthly costs.