Top Gear Bikes could sell its bicycles to retailers either assembled or unassemb
ID: 2359973 • Letter: T
Question
Top Gear Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows.
The unassembled bikes are sold to retailers at $390each.
Top Gear 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 $460each. Assembling the bikes will increase direct materials by $5per bike, and direct labor by $20per 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.
(a) Prepare an incremental analysis for the sell-or-process-further decision. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g.-15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)
(b) Should Top Gear sell or process further?
$155 Direct labor
70 Variable overhead (60% of direct labor)
42 Fixed overhead (40% of direct labor)
28 Manufacturing cost per unit
$295
Explanation / Answer
Based on the analysis shown below, since there is a net income increase per unit of $33, Top Gear should process further provided it has extra capacity
33
Sell Process further Net increase / (decrease) SP per unit 390 460 70 Cost per unit
Materials 155 160 (5) Labor 70 90 (20) Variable OH 42 54 (12) Fixed OH 28 28 0 Total 295 332 (37)
Net income per unit 95 128
33