This is a differential cost question that I cannot come up with the solution for.

This is a differential cost question that I cannot come up with the solution for.

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 unitsper month are shown in the following table:

Unit manufacturing costs

Variable costs
$
240

Fixed overhead

120

Total unit manufacturing costs

$
360

Unit nonmanufacturing costs

Variable

60

Fixed

140

Total unit nonmanufacturing costs

200

Total unit costs

$
560

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.

Requirement 1:

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 asorders are received from KCSB’s sales force. KCSB would provide the materials for each bicycle, but the outside contractor would assemble, box, andship the bicycles. The variable manufacturing costs would be reduced by 40 percent for the 800 bicycles assembled by the outside contractor. KCSB’sfixed nonmanufacturing costs would be unaffected, but its variable nonmanufacturing costs would be cut by 60 percent for these 800 units produced bythe outside contractor. KCSB’s plant would operate at 60 percent of its normal level, and total fixed manufacturing costs would be cut by 20 percent.

(a)

What in-house unit cost should be compared with the quotation received from the outside contractor? (Omit the “$” sign in yourresponse.)

Unit cost
$

(b)

Should the proposal be accepted for a price (that is, payment to the contractor) of $140 per unit?

(Click to select)YesNo

Requirement 2:

Assume the same facts as in requirement 1 but assume that the idle facilities would be used to produce 80 specialty racing bicycles per month. Theseracing bicycles could be sold for $8,000 each, while the costs of production would be $5,600 per unit variable manufacturing expense. Variablemarketing cost would be $200 per unit. Fixed nonmanufacturing and manufacturing costs would be unchanged whether the original 2,000 regular bicycleswere manufactured or the mix of 1,200 regular bicycles plus 80 racing bicycles was produced. What is the total net profit/loss for the following(Input all amounts as positive values. Omit the “$” sign in your response):

(a)

When the company itself produces and sells 2,000 units of bicycles per month.

(Click to select)Net profitNet loss
$

(b)

When the company produces 1,200 units of regular bicycles and use the idle facilities to produce 80 specially racing bicycles per month.

(Click to select)Net lossNet profit
$

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