E26-6 Donkey bikes could sell its bicycles to retailers eitherassembled or unass
ID: 2457534 • Letter: E
Question
E26-6
Donkey bikes could sell its bicycles to retailers eitherassembled or unassembled. The cost of an unassembled bike isas follows.
DirectMaterials $ 150
DirectLabor 70
Variable Overhead (71% of directlabor) 49
Fixed overhead (30% of directlabor) 21
Manufacturing perunit $290
The unassembled bikes are sold to retailers at $400 each.
Donkey currently has unused productive capacity that isexpected to continue indefinitely: Management has concluded thatsome of this capacity can be used to assemble the bikes andsell them at $450 each. Assembling the bikes will increase directmaterials by $5 per bike, and direct labor by $20 per bike.Additional variable overhead will be incurred at rhe normal ratesbut there will be no additional fixed overhead as a result ofassembling the bikes
Instructions
A. Prepare an incremental analysis for thesell or process further decision
B. Should Donkey sell or process further? Why or Whynot?
Explanation / Answer
Incremental Analysis SellingPrice of Assembled bikes 450.00 DirectMaterial 155.00 DirectLabor 90.00 VariableOverhead 63.00 FixedOverhead 21.00 329.00 Unit Contribution 121.00 CurrentScenario SellingPrice of Unassembled bikes 400.00 DirectMaterial 150.00 DirectLabor 70.00 VariableOverhead 49.00 FixedOverhead 21.00 290.00 Unit Contribution 110.00 Sellingthe Assembled bikes increases the UnitContribution Hence , they should processfurther & sell.
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