King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufa
ID: 2417224 • 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 $ 260 Fixed overhead 113 Total unit manufacturing costs $ 373 Unit nonmanufacturing costs Variable 50 Fixed 133 Total unit nonmanufacturing costs 183 Total unit costs $ 556 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 the2,000 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 15 percent. a-1. Calculate the in-house cost that must be compared with the quotation received from the outside contractor. a-2. Should the proposal be accepted for a price of $110 per unit? Yes No b. Assume the same facts as in requirement (a) but assume that the idle facilities would be used to produce 80 specialty racing bicycles per month. These racing bicycles could be sold for $7,300 each, while the costs of production would be $4,900 per unit variable manufacturing expense. Variable marketing cost would be $130 per unit. Fixed nonmanufacturing and manufacturing costs would be unchanged whether the original 2,000 regular bicycles were manufactured or the mix of 1,200 regular bicycles plus 80 racing bicycles was produced. What is the total net profit/loss for the following. b-1. When the company produces and sells 2,000 units of regular bicycles per month. b-2. When the company produces 1,200 units of regular bicycles and use the idle facilities to produce 80 specially racing bicycles per month.
Explanation / Answer
No. Of Bicycles 2000 Selling Price $600 Variable Cost per bicycle $260 Fixed Overhead 113 manufaturing Cost $373 Non manufaturing Cost variable 50 Fixed 133 Non manufaturing Cost $183 a-1 Inhouse Cost- savings if go for proposal Variable manufacturing cost reducing 30% $78.0 variable non manu. Cost wille be 50*.7 $35 Reduction in fixed manufacturing cost 113*.15 16.95 Total saving per unit $130.0 a-2 Yes, it should be accepted at $110 as saving is $130 per unit so net saving is $20 b Selling price of racing bicycle 7300 Variable manufacturing expesnes 4900 Variable non manufacturing expesnes 130 Profit 2270 B1 No.of Bicycle 2000 Selling Price $600 Variable Cost per bicycle $260 Fixed Overhead 113 manufaturing Cost $373 Non manufaturing Cost variable 50 Fixed 133 Non manufaturing Cost $183 Net profit per unit $44 Net profit $88,000 B2 No.of Bicycles 1200 800 Selling Price $600 600 Variable Cost per bicycle $260 $182.0 260*.7 Variable costpaid to outsider $110.0 Fixed Overhead 113 96.05 113*.85 manufaturing Cost $373 $388.1 Non manufaturing Cost variable 50 15 50*.3 Fixed 133 133 Non manufaturing Cost $183 148 Net profit per unit $44 $64.0 No. Of Bicycle $1,200 $800.0 Net Profit A $52,800 $51,160 B B2 No.of Bicycles $52,800 No.of bicycles 80 Selling price of racing bicycle 7300 Variable manufacturing expesnes 4900 Variable non manufacturing expesnes 130 Profit 2270 Net Profit C 181600 Total profit A+B+C $285,560 Ans
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