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

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 $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.

Instructions
(a) Prepare an incremental analysis for the sell-or-process-further decision.
(b) Should Speedy sell or process further? Why or why not?

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

Explanation / Answer

a)

b)Speedy shall process further as there is an incremental profit of $ 23

sale value after further processing 495 Less:Sale value at split off -450 Direct material cost - 5 Incrmental direct labor cost -10 Variable overhead   [10* .70] -7 Incremental profit /(loss) 23

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