Donkey Bikes could sell its bicycles to retailers either assembled or unassemble

Question

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

Direct materials $148
Direct labor 65
Variable overhead (69% of direct labor) 45
Fixed overhead (31% of direct labor)
20

Manufacturing cost per unit
$278


The unassembled bikes are sold to retailers at $398 each.
Donkey 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 $456 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $18 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.

Instructions

Complete the incremental analysis for the sell-or-process-further decision. (If an amount should be blank, enter a zero. All boxes must be filled to be correct. If amount decreases net income, use either a negative sign preceding the number eg -45 or parentheses eg (45).)




Net income
sell process further Increase (decrease)
sales per unit
costs per unit
materials
labor
varialbe overhead
fixed overhead
total

net income per unit
should donkey sell or process further?

Explanation / Answer

unassembled bikes Assembled bikes Sale price of each bike $398 $456 Direct materials $148 $153 Direct labor $65 $83 variable overheads(69% of direct labor) $45 $57 Total variable cost $258 $293 Fixed cost $20 $20 Total cost $278 $313 Net income on each bike $120 $143 Note: By assembling the bike the net income earned is $143, and without assembling the net income earned is $120, there is a margin of $23 per bike of net income. So it is better to assemble the bike and sell them.

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