Be careful when you use the data to determine fixed costs. And make sure you understand the two alternatives. The "make" means that KCSB makes, assembles, and ships all of its bicycles. The "buy" means that KCSB
- makes, assembles, and ships some of its bicycles,
- makes some of its bicycles and pays another firm to assemble and ship them, and
- uses idle resources to make and sell specialty racing bicycles
King City Specialty Bikes (KCSB) produces high-end bicycles. The unit costs to manufacture and market the bicycles at last year's volume level of 1,800 bicycles per month are shown in the following table:
|
Unit manufacturing costs
|
|
|
|
Variable
|
$240
|
|
|
Fixed
|
102
|
|
|
Total unit manufacturing costs
|
|
$342
|
|
Unit nonmanufacturing costs
|
|
|
|
Variable
|
52
|
|
|
Fixed
|
133
|
|
|
Total unit nonmanufacturing costs
|
|
185
|
|
Total unit costs
|
|
$527
|
CSB expects to produce and sell 2,200 bicycles per month in the coming year. The bicycles sell for $620 each.
KCSB receives a proposal from an outside contractor who, for $165 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 60%.
KCSB's marketing manager thinks that it could sell 75 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 $4,300 per bicycle and variable nonmanufacturing costs of $450 per bicycle.
If KCSB accepts the proposal, it would be able to save 10% 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.)