King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufactur
ID: 2541687 • Letter: K
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:
KCSB expects to produce and sell 2,100 bicycles per month in the coming year. The bicycles sell for $650 each.
KCSB receives a proposal from an outside contractor who, for $160 per bicycle, will assemble 750 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 750 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 750 bicycles would be cut by 55%.
KCSB's marketing manager thinks that it could sell 80 specialty racing bicycles per month for $5,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,500 per bicycle and variable nonmanufacturing costs of $300 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]
1) What is the difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal?
Variable manufacturing per unit $241.00 Total fixed manufacturing $199,800 Variable nonmanufacturing per unit $70.00 Total fixed nonmanufacturing $260,850Explanation / Answer
1) Reject Accept Variable manufacturing cost 120000 99412.5 (750*160) (750*160) 750*241*(1-0.45) Total fixed manufacturing 199800 0 Variable non-manufacturing 52500 23625 (750*70) 750*70*(1-0.55) Total fixed nonmanufacturing 260850 247807.5 260850*(1-0.05) Paid to outsider 120000 (750*160) 633150 490845 Difference 142305
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