Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,050 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

If the proposal is rejected

   Revenue per unit- $610

-Variable manufacturing cost p.u-$242

-variable non manufacturing cost p.u-$62

­­­­____________________________________

Contribution per unit-$306

Estimated production-2450

Total contribution-$306*2450=$749700

-fixed manufacturing cost   -    $274700

-fixed non manufacturing cost-$307500

­______________________________________

Total profit   =$167500

Total cost under current scheme=$744800+$274700+$307500=$1327000

If the proposal is accepted

Estimated production= 2450 bicycle

Under proposal= 750 bicycle

Balance bicycle= 1700

Special racing bicycle= 70 bicycle

Revenue per unit(1700 bicycle)- - $610

-Variable manufacturing cost p.u-$242

-variable non manufacturing cost p.u-$62

____________________________________

Contribution per unit-$306

Estimated production-1700

Total contribution-$306*1700=$520200

Revenue per unit(750 bicycle)- - $610

-Variable manufacturing cost p.u-$133(reduced by 45%)

-variable non manufacturing cost p.u-$25(reduced by 60%)

- assembling cost p.u-$155(given)

____________________________________

Contribution per unit-$297

Estimated production-750

Total contribution-$297*750=$222750

Special racing bicycle= 70 bicycle

Revenue per unit(70 bicycle)- $5500

-Variable manufacturing cost p.u-$4300

-variable non manufacturing cost p.u-$300

____________________________________

Contribution per unit-$900

Estimated production-70

Total contribution-$900*70=$63000

Total contribution under proposal=$520200+$222750+$63000=$805950

• Fixed manufacturing cost =$274700*95%=$260965
• Fixed non manufacturing cost= $307500

___________________________________

Total profit=$237485

Total cost under proposed scheme

= variable cost($322000+$234750+$516800) + fixed cost ($260965+$307500)=$1642015

difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal=$1642015-$$1327000

=($315015) negative because cost of accepting the proposal is more,however we should note that since our profit is increasing by$69985 hence we should accept the proposal.