Question

Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows:

Direct materials $150

Direct labor 70

Variable overhead (70% of direct labor) 49

Fixed overhead (30% of direct labor) 21

Manufacturing cost per unit $290

The unassembled bikes are sold to retailers at $400 each.

Speedy currently has unused productive capacity that is expected to continue indefinitely; management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the bikes.

Prepare an incremental analysis for the sell-or-process-further decision.

Answer 1

Incremental analysis

	Sell	Process further	Increase/Decrease in income
Sales per unit	400	440	40
Material per unit	150	155	- 5
Labor per unit	70	80	- 10
Variable OH per unit	49	56	- 7
Fixed OH per unit	21	21	0
Total cost per unit	290	312	- 22
Net income per unit	110	128	18

Processing further will result in an incremental income of $18 per unit

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Answer 2