Question

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 1,950 bicycles per month are shown in the following table:

Variable manufacturing per unit	$247.00
Total fixed manufacturing	$204,750
Variable nonmanufacturing per unit	$69.00
Total fixed nonmanufacturing	$288,600

KCSB expects to produce and sell 2,250 bicycles per month in the coming year. The bicycles sell for $610 each.

KCSB receives a proposal from an outside contractor who, for $150 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 40% 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 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 $250 per bicycle.

If KCSB accepts the proposal, it would be able to save $20,475 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

Answer 1

Decrease in variable manufacturing cost per unit (247*40%)	$               98.80
Decrease in variable nonmanufacturing cost per unit (69*60%)	$               41.40
Decrease in variable cost per unit	$             140.20
Price Paid to the outside contractor	$             150.00
Decrease in variable cost per unit	$             140.20
Net Decrease in contribution margin per unit for outsourcing of Work (170-125.6)	$                 9.80
Multiply: Number of Units Assemble by the outside contractor	900
Net Decrease in contribution margin for outsourcing of Work	$               8,820
Saving in fixed manufacturing cost	$             20,475
Less: Net Decrease in contribution margin for outsourcing of Work	$               8,820
Gain from outsourcing of work	$             11,655
Contribution margin from racing bicycles
Selling price of racing bicycle	$               6,500
Less: variable manufacturing cost per racing bicycle	$               5,400
Less: variable nonmanufacturing cost per racing bicycle	$                   250
Contribution margin per racing bicycle	$                   850
Multiply: Number of racing bicycles	$                     80
Contribution margin from racing bicycles	$             68,000
Contribution margin from racing bicycles	$             68,000
Add: Gain from outsourcing of work	$             11,655
Increase in Profit if KCSB accepts the proposal	$             79,655
King City Specialty Bikes (KCSB) should accept the proposal.