Donkey 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 $400 each.

Donkey 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 $450 each. Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $20 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 Donkey sell or process further? Why or why not?