Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,100 bicycles per month are shown in the following table:

Variable manufacturing per unit	$245.00
Total fixed manufacturing	$224,700
Variable nonmanufacturing per unit	$56.00
Total fixed nonmanufacturing	$298,200

KCSB expects to produce and sell 2,450 bicycles per month in the coming year. The bicycles sell for $640 each.

KCSB receives a proposal from an outside contractor who, for $170 per bicycle, will assemble 850 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 40% for the 850 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 850 bicycles would be cut by 60%.

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 $5,500 per bicycle and variable nonmanufacturing costs of $350 per bicycle.

If KCSB accepts the proposal, it would be able to save 10% of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

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

The cost under both scenarios will be as follows:

	Reject proposal	Accept proposal
Units	850	850
Variable manufacturing per unit	245	147
Variable manufacturing cost	208250	124950
Total fixed manufacturing	224700	202230
Variable non manufacturing per unit	56	22.4
Variable non manufacturing cost	47600	19040
Total fixed non manufacturing	298200	298200
Contractor cost per unit	0	170
Contractor cost	0	144500
Total cost(a)	778750	788920
Additional racing bicycle units		85
Selling price per unit		6500
Variable manufacturing cost per unit		5500
Variable non manufacturing cost per unit		350
Total cost per unit		5850
Sales revenue		552500
Total cost		497250
Additional income(b)	0	55250
Final cost(a-b)	778750	733670
Difference		45080