Question
King City Specialty Bikes (KCSB) produces high-end bicycles. The costs to manufacture and market the bicycles at last year's volume level of 1,800 bicycles per
King City Specialty Bikes (KCSB) produces high-end bicycles. The 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 | 228 | |
Fixed | 115 | |
Total Unit Manufacturing Costs | 343 | |
Unit Nonmanufacturing Costs | ||
Variable | 68 | |
Fixed | 144 | |
Total Unit nonmanufactuing costs | 212 | |
Total unit costs | $555 |
KCSB expects to produce and sell 2,100 bicycles per month in the coming year. The bicycles sell for $590 each.
KCSB receives a proposal from an outside contractor who, for $155 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 85 specialty racing bicycles per month for $6,500 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $5,400 per bicycle and variable nonmanufacturing costs of $400 per bicycle.
If KCSB produces the mix of 1,350 regular bicycles plus 85 racing bicycles instead of producing all 2,100 regular bicycles, it would be able to save 5% of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.
How much will KCSB's monthly profits change if it accepts the proposal for the 750 bicycles and uses the idle resources to produce the 85 racing bicycles?
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