Question

King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at the company's volume of 2,000 units per month are shown in the following table:

                      
Unit manufacturing costs                       
Variable costs    $    260               
Fixed overhead        113               
Total unit manufacturing costs                $    373   
Unit nonmanufacturing costs                       
Variable        50               
Fixed        133               
Total unit nonmanufacturing costs                    183   
Total unit costs                $    556   

The company has the capacity to produce 2,000 units per month and always operates at full capacity. The bicycles sell for $600 per unit.

Required:

a. KCSB receives a proposal from an outside contractor who will assemble 800 of the 2,000 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 30 percent for the 800 bicycles assembled by the outside contractor. KCSB’s fixed nonmanufacturing costs would be unaffected, but its variable nonmanufacturing costs would be cut by 70 percent for these 800 units produced by the outside contractor. KCSB’s plant would operate at 60 percent of its normal level, and total fixed manufacturing costs would be cut by 15 percent.

a-1. Calculate the in-house unit cost that must be compared with the quotation received from the outside contractor. Assume the payment to the outside contractor is $110.

a-2. Should the proposal be accepted for a price (that is, payment to the contractor) of $110 per unit?

   Yes
   No

b. Assume the same facts as in requirement (a) but assume that the idle facilities would be used to produce 80 specialty racing bicycles per month. These racing bicycles could be sold for $7,300 each, while the costs of production would be $4,900 per unit variable manufacturing cost. Variable marketing costs would be $130 per unit. Fixed nonmanufacturing and manufacturing costs would be unchanged whether the original 2,000 regular bicycles were manufactured or the mix of 1,200 regular bicycles plus 80 racing bicycles was produced. What is the total net profit/loss for the following.

b-1. When the company produces and sells 2,000 units of regular bicycles per month. Assume the payment to the outside contractor is $110.

b-2. When the company produces 1,200 units of regular bicycles and use the idle facilities to produce 80 specially racing bicycles per month.

b-3. Should the contractor’s proposal of $110 per unit be accepted?

   Yes
   No

Answer 1

Ans
A-1		Calculation of in house cost for comparison
			Amount
		Saving in variable manufacturing ccost	78
		(260*30%)
		Saving in variable nonmanufacturing cost	35
		(50*70%)
		Saving in Fixed manufacturing cost	42.38
		(2000*113*15%/800)
		Total	155
A-2		Proposal for price $ 110 should be accepted as in house cost is $155.
B 1		Net proft calculation in case of 2000 Regulat cycle produced
		Paticular	1,200		800
		Sale 600 per unit	720,000		480,000
		Less:-
		Variable cost 260 per unit	312,000		145,600
		Fixed Cost	135,600		56,496
		variable nonmanufacturing cost	60,000		12,000
		Fixed nonmanufacturing cost	159,600		106,400
		Payment to outside contractor			88,000
		Total cost	667,200		408,496
		Profit	52,800		71,504
B2		Particular	1,200		80
		Sale	720,000		584,000
		Less:-
		Variable cost 260 per unit	312,000		392,000
		Fixed Cost	135,600		90,400
		variable non manufacturing cost	60,000		10,400
		Fixed non manufacturing cost	159,600		106,400
		Total cost	667,200		599,200
		Profit	52,800		(15,200)
B3		Yes contractor proposal should be accepted as there is profit in accepting proposal