Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,800 bicycles per month are shown in the following table:

Variable manufacturing per unit $246.00

Total fixed manufacturing $216,000

Variable nonmanufacturing per unit $58.00

Total fixed nonmanufacturing $266,400

KCSB expects to produce and sell 2,150 bicycles per month in the coming year. The bicycles sell for $620 each.

KCSB receives a proposal from an outside contractor who, for $165 per bicycle, will assemble 700 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% for the 700 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 700 bicycles would be cut by 60%. KCSB's marketing manager thinks that it could sell 80 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 $4,800 per bicycle and variable nonmanufacturing costs of $300 per bicycle.

If KCSB accepts the proposal, it would be able to save $21,600 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

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

Your answer is	54,120.00
	Option 1	Option 2		Option 3
	MAKE	MAKE & BUY		special bike
BIKES	2150	700	1450	80
Variable mfr cost	$                246.00	$          172.20	$          246.00	4800
total variable mfr cost	$       528,900.00	$ 120,540.00	$ 356,700.00	$ 384,000.00
Variable non mfr cost	$                  58.00	$            23.20	$            58.00	300
total variable non mfr cost	$       124,700.00	$    16,240.00	$    84,100.00	$    24,000.00
Purchase price		$ 115,500.00
700*165
Fixed mfr cost	$       216,000.00	$                               194,400.00
fixed non mfr cost	$       266,400.00	$                               266,400.00
total costs	$    1,136,000.00	$                           1,153,880.00
less:sales
80*6000				$ 480,000.00
oportunity cost				$    72,000.00
216000-21600=	194400
so we have
option 1	$    1,136,000.00
option 2	$ (1,153,880.00)
option 3	$          72,000.00
differenc in montly costs	$          54,120.00