Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,150 bicycles per month are shown in the following table:

Variable manufacturing per unit	$227.00
Total fixed manufacturing	$277,350
Variable nonmanufacturing per unit	$51.00
Total fixed nonmanufacturing	$290,250

KCSB expects to produce and sell 2,400 bicycles per month in the coming year. The bicycles sell for $650 each.

KCSB receives a proposal from an outside contractor who, for $160 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 55%.

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 $450 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

proposal from an outside contractor

                                                         Rejecting the proposal                    Accepting th eproposal

Payment to Conractor per Unit                                    NA                                    $160

Variable manufacturing per unit                             $227                                      $124.85 (i.e,227*.55)

Variable nonmanufacturing per unit                         $51                                         $22.95 (i.e,51*.45)

                                                                           -------------                                    ------------

                                                                              $278                                          $307.8

                      2,400 Units* $278                         $667,200                         $694,020 (i.e,900*$307.8+1500*278)

Total fixed manufacturing                                    $277,350                           $277,350

Total fixed nonmanufacturing                              $290,250                            $290,250    

                                                                      ___________                        __________

Total cost                                                       $1,234,800                             $1,261,620       

                                                                      =========                           ==========

Difference $1,234,800  - $1,261,620 = - $26,820

Marketing manager Proposal

Selling Price                                                                $6,000

Less:Variable cost                          $5,000

Variable non manufacturing            $450

                                                      ------------               $5,450

                                                                                -------------

Contribution                                                                $550

Contribution amount (80*$550)                              $44,000

Add :savings of 5 % of $277,350                           $13,868

                                                                             ________

Total Margin                                                            $57,868

                                                                              =======

Marketing manager proposal yield additional profit of $57,868