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King City Specialty Bikes (KCSB) produces high-end bicycles. Thecosts to manufacture and market the bicycles at the company'svolume of 2,000 units per month are shown in the followingtable:
| | | | | | |
| Unit manufacturing costs | | | | | | |
| Variable costs | $ | 240 | | | | |
| Fixed overhead | | 129 | | | | |
| Total unit manufacturing costs | | | | $ | 369 | |
| Unit nonmanufacturing costs | | | | | | |
| Variable | | 60 | | | | |
| Fixed | | 149 | | | | |
| Total unit nonmanufacturing costs | | | | | 209 | |
| Total unit costs | | | | $ | 578 | |
|
The company has the capacity to produce 2,000 units per monthand always operates at full capacity. The bicycles sell for $620per unit.
Required:
a. KCSB receives a proposal from an outsidecontractor who will assemble 800 of the 2,000 bicycles per monthand ship them directly to KCSB’s customers as orders are receivedfrom KCSB’s sales force. KCSB would provide the materials for eachbicycle, but the outside contractor would assemble, box, and shipthe bicycles. The variable manufacturing costs would be reduced by30 percent for the 800 bicycles assembled by the outsidecontractor. KCSB’s fixed nonmanufacturing costs would beunaffected, but its variable nonmanufacturing costs would be cut by70 percent for these 800 units produced by the outside contractor.KCSB’s plant would operate at 60 percent of its normal level, andtotal fixed manufacturing costs would be cut by 20 percent.
a-1. Calculate the in-house unit cost that mustbe compared with the quotation received from the outsidecontractor. Assume the payment to the outside contractor is$130.
a-2. Should the proposal be accepted for aprice (that is, payment to the contractor) of $130 per unit?
b. Assume the same facts as in requirement(a) but assume that the idle facilities would be used toproduce 80 specialty racing bicycles per month. These racingbicycles could be sold for $8,900 each, while the costs ofproduction would be $6,500 per unit variable manufacturing cost.Variable marketing costs would be $290 per unit. Fixednonmanufacturing and manufacturing costs would be unchanged whetherthe original 2,000 regular bicycles were manufactured or the mix of1,200 regular bicycles plus 80 racing bicycles was produced. Whatis the total net profit/loss for the following.
b-1. When the company produces and sells 2,000units of regular bicycles per month. Assume the payment to theoutside contractor is $130.
b-2. When the company produces 1,200 units ofregular bicycles and use the idle facilities to produce 80specially racing bicycles per month.
b-3. Should the contractor’s proposal of $130per unit be accepted?
