Question

Make sure you understand the two alternatives. The "make" means that KCSB makes, assembles, and ships all of its bicycles. The "buy" means that KCSB

makes, assembles, and ships some of its bicycles,

makes some of its bicycles and pays another firm to assemble and ship them, and

uses idle resources to make and sell specialty racing bicycles

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King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,900 bicycles per month are shown in the following table:

Variable manufacturing per unit	$256.00
Total fixed manufacturing	$214,700
Variable nonmanufacturing per unit	$67.00
Total fixed nonmanufacturing	$262,200

KCSB expects to produce and sell 2,100 bicycles per month in the coming year. The bicycles sell for $570 each.

KCSB receives a proposal from an outside contractor who, for $155 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 80 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 $5,000 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

The proposal of 900 bicycles from outside contractor is acceptable, as it provides more NOI to 80 specialty bicyles.
Working :
Proposal I :
variable Manuf cost reduced	256*45%=115.20
Variable NonManuf costs reduced	67*60% = 40.20
Total variable costs saving = 115.20+40.20=155.40
less: payment to contractor per bicycle = $155
Net saving of $0.40
Net contribution of 900 bicycle(570-256-67+0.40)=	222660
contribution of regular sales(570-323)	518700
Total contribution	741360
Less: fixed Manuf+NonManuf costs	476900
NOI	264460
Proposal II:
80 specialty racing bicycles :
Selling price	$6,000
less: Varia Manuf costs	-5000
Less: varia nonManuf costs	-350
Unit contribution	650
Total contribution (80*650)	52000
contribution of regular sales(570-323)	518700
Less: fixed Manuf costs (0.95)	-203965
Less: Fixed NonManuf costs	-262200
NOI	104535