Question

Please Show work!

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	$	240
Fixed overhead		129
Total unit manufacturing costs				$	369
Unit nonmanufacturing costs
Variable		60
Fixed		149
Total unit nonmanufacturing costs					209
Total unit costs				$	578

The company has the capacity to produce 2,000 units per month and always operates at full capacity. The bicycles sell for $620 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 20 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 $130.

a-2. Should the proposal be accepted for a price (that is, payment to the contractor) of $130 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 $8,900 each, while the costs of production would be $6,500 per unit variable manufacturing cost. Variable marketing costs would be $290 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 $130.

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 $130 per unit be accepted?

	Yes
	No

Answer 1

Solution a-1:
Computation of In house unit cost relevant to assembly proposal - KCSB
Particulars	Amount
Reduction in variable manufacturing cost ($240*30%*800)	57600
Reduction in variable non manufacturing cost ($60*70%*800)	33600
Reduction in fixed manufacturing cost (2000*$129*20%)	51600
Total relevant cost of assembling 800 units	142800
Nos of units	800
In house cost per unit	178.5

Solution a2:

$130 Offered by Contractor which is less thab from in house cost of $178.50 . Hence . Proposal of contractor should be accepted.

Solution b-1:
Computation of Income - Regular production of 2000 bicycle
Particulars	Amount
Sales (2000 * $620)	1240000
Variable cost:
Variable manufacturing cost (2000*$240)	480000
Variable non manufacturing cost (2000*$60)	120000
Total Variable cost	600000
Contribution Margin	640000
Fixed Expenses:
Fixed Manufacturing cost (2000*$129)	258000
Fixed non manufacturing cost (2000*149)	298000
Total fixed cost	556000
Net Income	84000

Solution b-2:
Computation of Income - Regular production of 1200 bicycle, 80 special racing bicycle
Particulars	Amount
Sales (2000 * $620 + 80*8900)	1952000
Variable cost:
Assembly charges from outside contractor (800*$130)	104000
Variable manufacturing cost of regular bicycle (1200*$240 + 800*$240*70%)	422400
Variable non manufacturing cost for regular bicycle (1200*$60 + 800*$60*30%)	86400
Variable manufacturing cost of special racing bicycle (80*$6,500)	520000
Variable non manufacturing cost for special racing bicycle (80*$290)	23200
Total Variable cost	1156000
Contribution Margin	796000
Fixed Expenses:
Fixed Manufacturing cost (2000*$129)	258000
Fixed non manufacturing cost (2000*$149)	298000
Total fixed cost	556000
Net Income	240000
Solution b-3:
As net income in accepting proposal from outside contractor is higher than regular production and sale of 2000 bicyle therefore, contractor's proposal of $130 per unit will be accepted.