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

______________________________________________________

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	$242.00
Total fixed manufacturing	$274,700
Variable nonmanufacturing per unit	$62.00
Total fixed nonmanufacturing	$307,500

KCSB expects to produce and sell 2,450 bicycles per month in the coming year. The bicycles sell for $610 each.

KCSB receives a proposal from an outside contractor who, for $155 per bicycle, will assemble 750 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 750 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 750 bicycles would be cut by 60%.

KCSB's marketing manager thinks that it could sell 70 specialty racing bicycles per month for $5,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,300 per bicycle and variable nonmanufacturing costs of $300 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

	Cost to manufacture as per last years volume level of 2050/month
		(Amounts in $)
	Variable manufacturing/ Unit	242
	Total fixed manufacturing	274700
	Variable nonmanufacturing/ Unit	62
	Total fixed nonmanufacturing	307500
A	MONTHLY COST IF NOT ACCEPTING THE PROPOSAL
	Monthly production and sales	2450
		Cost/Unit	Unit	(Amounts in $)
	Variable manufacturing cost	242	2450	592900
	Total fixed manufacturing			274700
	Variable nonmanufacturing cost	62	2450	151900
	Total fixed nonmanufacturing			307500
	Total Cost			1327000
B	MONTHLY COST IF ACCEPTING THE PROPOSAL
	Monthly production and sales	2450
	Less: Proposal from outside contractor	750
	KCSB production and assembly	1700
			(Amounts in $)
	Variable manufacturing cost - KCSB	242	1700	411400
	Variable manufacturing cost - Outside contractor	133	750	99750
	(Manufacturing cost reduced by 45%= 242*(100-45)% = 133.1)
	Variable nonmanufacturing cost	62	1700	105400
	Variable nonmanufacturing cost - Outside contractor	25	750	18750
	(nonmanufacturing cost reduced by 60%= 62*(100-60)% = 24.8)
	Outside contractor cost	155	750	116250
	Total fixed manufacturing			274700
	Total fixed nonmanufacturing			307500
				1333750
	Less: Earning through specialty racing bicycle sales
	Sales price of specialty bicycles	5500
	Less: Variable manufacturing cost/unit	4300
	Less: Variable nonmanufacturing cost/unit	300
	Margin earned	900	70	63000
	Total Cost			1270750
		(Amounts in $)
	A-Cost of rejecting the proposal	1327000
	B- Cost of accepting the proposal	1270750
	Difference (Positive)	56250