Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the ...

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,800 bicycles per month are shown in the following table:

Variable manufacturing per unit	$227.00
Total fixed manufacturing	$244,800
Variable nonmanufacturing per unit	$57.00
Total fixed nonmanufacturing	$250,200

KCSB expects to produce and sell 2,100 bicycles per month in the coming year. The bicycles sell for $600 each.

KCSB receives a proposal from an outside contractor who, for $150 per bicycle, will assemble 700 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 700 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 700 bicycles would be cut by 60%.

KCSB's marketing manager thinks that it could sell 85 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 $4,800 per bicycle and variable nonmanufacturing costs of $350 per bicycle.

If KCSB accepts the proposal, it would be able to save 5% 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

			If proposal accepted
	If proposal rejected	Working	700 from contractor	1400 in house	Racing cycle 85	Total
No of Units	2100		700	1400	85	2185
Selling Price	600		600	600	6000
Outside Vendor Cost			150			150
Variable Cost
-Manufacturing	227	Reduce by 45% for 700 units	124.85	227	4800	5151.85
-NonManufacturing	57	Reduce by 60% for 700 units	22.8	57	350	429.8
Total Variable Cost per unit	284		297.65	284	5150	5731.65
Fixed Cost
-Manufacturing	244800	Reduce by 5%				232560
-NonManufacturing	250200	Same				250200
Total Fixed Cost	495000					482760
Total Variable Cost (Per unit*Units)	596400		208355	397600		605955
Total Cost	1091400					1088715
Cost if proposal rejected	1091400
Cost if proposal accepted	1088715
Benefit in cost if accepted	2685
Incremental GM from racing bicycle	72250
(6000-5150)*85
Total Benefit	74935