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?

Explanation / Answer

Contribution statement of unassembled bike and assembled bike Unassembled bike Assembled bike Incremental in $ per Unit in $ per Unit in $ per Unit Sale 450 495 45 Less : Variable cost - Direct Material 150 155 - Direct labour 70 80 - Variable overhead 49 269 49 284 15 Contribution margin 181 211 30 Less : Fixed cost 21 21 0 Net Operating Income 160 190 30 There is rise in net operating income per unit by $30 if Speedy bike process further and sell assembled bike. Hence Speedy bike should process further.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.