Sell or Process Further Jensen Manufacturing Company makes a partially completed

Question

Sell or Process Further Jensen Manufacturing Company makes a partially completed assembly unit that it sells for $36 per unit. Normally, 42,000 units are sold each year. Variable unit cost data on the assembly are as follows: Direct material Direct labor Variable manufacturing overhead $10 4 The company is now using only 70% of its normal capacity, it could fully use its normal capacity by processing the assembly further and selling it for $43 per unit. If the company does this, material and labor costs will each increase by $2 per unit and variable overhead will go up by $1 per unit. Fixed costs will increase from the current level of $160,000 to $220,000 Prepare an analysis showing whether Jensen should process the assemblies further. Use a negative sign with answer to only indicate an income loss from processing assemblies further; otherwise do not use negative signs with your answers. Sell of Process Further Differential Analysis Differential revenue 420,000 X Differential costs Direct material 12,000 X Direct labor 12,000 X Variable overhead 6,000 Fixed costs 6,000 X Additional income (loss) from processing further 60,000 X

Explanation / Answer

Differential revenue 294000 =42000*(43-36) Differential costs: Direct material 84000 =42000*2 Direct labor 84000 =42000*2 Variable overhead 42000 =42000*1 Fixed costs 60000 =220000-160000 Additional income(loss) 24000

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