Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,850 bicycles per month are shown in the following table: Variable manufacturing per unit $221.00 Total fixed manufacturing $197,950 Variable nonmanufacturing per unit $60.00 Total fixed nonmanufacturing $275,650 KCSB expects to produce and sell 2,200 bicycles per month in the coming year. The bicycles sell for $620 each. KCSB receives a proposal from an outside contractor who, for $150 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 45% for the 700 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 700 bicycles would be cut by 55%. KCSB's marketing manager thinks that it could sell 80 specialty racing bicycles per month for $6,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $5,400 per bicycle and variable nonmanufacturing costs of $400 per bicycle. If KCSB accepts the proposal, it would be able to save $19,795 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

Solution:

KCSB - Comparative Analysis of monthly cost of accepting and rejecting the proposal of assembling
Particulars	Alt 1 - Accept assembly propsal	Alt 2 - Reject assembly propsal	Differential effect (Alt 1)
Total assembling charges to be taken by outside contractor (700*$150)	$1,05,000.00	$0.00	-$1,05,000.00
Variable manufacturing cost Alt 1 - 221*55%*700 Alt 2 = 221*700	$85,085.00	$1,54,700.00	$69,615.00
Variable nonmanufacturing cost Alt 1 - 60*45%*700 Alt 2 = 60*700	$18,900.00	$42,000.00	$23,100.00
Reduction in Fixed Manufacturing cost	-$19,795.00		$19,795.00
			$0.00
Contribution from sale of special racing bicycle on acceptance of proposal ($6,500 - $5,400 - $400)*80	-$56,000.00	$0.00	$56,000.00
			$0.00
Net monthly cost of each alternative	$1,33,190.00	$1,96,700.00	$63,510.00