King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufa
ID: 2397975 • Letter: K
Question
King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at the company's volume of 2,000 units per month are shown in the following table: Unit manufacturing costs Variable costs Fixed overhead $260 114 $ 374 Total unit manufacturing costs Unit nonmanufacturing costs Variable Fixed 50 134 184 $558 Total unit nonmanufacturing costs Total unit costs The company has the capacity to produce 2,000 units per month and always operates at full capacity. The bicycles sell for $600 per unit. Required: a. KCSB receives a proposal from an outside contractor who will assemble 800 of the 2,000 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 percent for the 800 bicycles assembled by the outside contractor. KCSB's fixed nonmanufacturing costs would be unaffected, but its variable nonmanufacturing costs would be cut by 70 percent for these 800 units produced by the outside contractor. KCSB's plant would operate at 60 percent of its normal level, and total fixed manufacturing costs would be cut by 25 percent. a-1. Calculate the in-house unit cost that must be compared with the quotation received from the outside contractor Assume the payment to the outside contractor is $130. Unit cost a-2. Should the proposal be accepted for a price (that is, payment to the contractor) of $130 per unit? Yes NoExplanation / Answer
A.
Total savings from outsourcing (per unit): Variable manufacturing costs: 260*30% =$78
Variable non-manufacturing costs: 50*70% = 35
Fixed manufacturing costs: 114*2000*.25/800= 71.25
Total avoidable unit cost:184.25
KCSB can save $184.25 per bike by outsourcing assembly, but only has to pay $130. They should outsource assembly for the 800 bikes
yes they should accept the proposal
B.
Again, assume that a supplier has offered to assemble 800 bicycles for KCSB each month for $130 per bicycle. The terms of the arrangement are the same as in part (a) above. The variable cost savings are also the same as before:
Cost reductions for the 800 outsourced bicycles:
$78 reduction in variable unit manufacturing cost
$35 reduction in variable unit selling cost
B-1 They will be (184.25-130)*800=$43,400 better off.
Now, however, KCSB will use the idle facilities to produce 80 specialty racing bicycles per month. (That is, if they outsource 800 regular bicycles, they can use that space to produce 80 specialty bicycles instead). Since the manufacturing facilities will continue to be in use, no fixed costs are avoided by outsourcing. The racing bicycles have the following price and cost information:
Selling price: $7,400
Variable Manufacturing Cost: $5,000 per unit
Variable marketing costs: $140 per unit
KCSB avoids 78+35=$113 of variable costs for each regular bike that is assembled by the contractor (see part a). I
In addition, they will gain (7400-5000-140)*80=$180,800 of contribution margin from the specialty bikes, which is 180,800/800=$226 per regular bike.
Combined, the gain from outsourcing assembly is 113+226=$339 for each regular bike that is outsourced. This is the most they would possibly be willing to pay for the contractor to assemble the regular bikes (although they want to negotiate to pay as little as possible).
B-2
They will be (339-130)*800=$167,200 better off.
YES THEY WILL BE WILLING TO ACCEPT THE OFFER OF CONTRACTOR
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.