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 $450 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 $495 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.

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.

Required:
a. Prepare an incremental analysis for the sell-or-process-further decision.
b. Should Speedy sell or process further?

Why or why not?

Question

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Respuesta :

anthougo anthougo · Answer 1 · 2021-04-21T20:00:14+02:00

Answer:

Speedy Bikes

a. Incremental Analysis for the sell-or-process-further decision:

Cost of an Cost an Difference

unassembled bike assembled bike

Alternative 1 Alternative 2 Increment

Sales price of unassembled bike $450 $495 $45

Manufacturing cost per unit $290 $312 (22)

Net operating income $160 $183 $23

b. Speedy should process the bikes further.

c. It will generate an incremental net operating income of $23 per bike.

Explanation:

a) Data and Calculations:

Cost of an Cost an

unassembled bike assembled bike

Direct materials $150 $155

Direct labor 70 80

Variable overhead (70% of direct labor) 49 56 ($80 * 70%)

Fixed overhead (30% of direct labor) 21 21

Manufacturing cost per unit $290 $312