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 2,150 bicycles per month are shown in the following table:

Variable manufacturing per unit	$255.00
Total fixed manufacturing	$221,450
Variable nonmanufacturing per unit	$63.00
Total fixed nonmanufacturing	$322,500

KCSB expects to produce and sell 2,400 bicycles per month in the coming year. The bicycles sell for $550 each.

KCSB receives a proposal from an outside contractor who, for $165 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 60%.

KCSB's marketing manager thinks that it could sell 85 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 $250 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 of accepting the proposal.
Relevent costs
	Payment to outside contractor per bicylce				165
	No. of bicycle				900
	Total Costs of outside contract					148500
Cost of rejecting the proposals
Relevent savings
	Saving in Variable manufacturing costs
		=255*45%*900			103275
	Saving in Variable non-manufacturing costs
		=63*60%*900			34020
	Saving in fixed manufacturing costs
		=221450*5%			11072.5
Relevent Revene
		=(6000-5000-250)*85			63750
Total Relevent Revenue and Savings						212117.5
	Increamental Revenue					63617.5
		OR
	Difference in KCSB's monthly costs between accepting proposal and rejecting the proposal
Since cost of accepting the proposal are less than costs of rejecting it
we should accept the proposal