King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufactur
ID: 2542009 • 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 2,150 bicycles per month are shown in the following table: Variable manufacturing per unit $247.00 Total fixed manufacturing $240,800 Variable nonmanufacturing per unit $50.00 Total fixed nonmanufacturing $294,550 KCSB expects to produce and sell 2,450 bicycles per month in the coming year. The bicycles sell for $590 each. KCSB receives a proposal from an outside contractor who, for $170 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 30% 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 $6,000 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $4,800 per bicycle and variable nonmanufacturing costs of $400 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] 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.)
Explanation / Answer
Revenue From Sell of Racing Bicycles : Units sell [Price- variable manufacturing -variable non manufacturing]
= 80 [6000- 4800 -400]
= 64000
900[50(1-.60)] =18000
Accepting the proposal will result in saving of $ 16730 so it should be accepted.
If Proposal Is acceted [A] If Proposal Not accepted [B] Difference[B-A] Revenue from sell of racing bicycles - 64000 0 64000 Fixed manufacturing cost 240800 (1-.05) =228760 240800 12040 Payment for asembling 170*900 = 153000 0 -153000 Variable manufacturing cost 900[247(1-.30)] =155610 900*247=222300 66690 variable non manufacturing cost900[50(1-.60)] =18000
900*50=45000 27000 Total cost 491370 508100 16730Related Questions
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