Question: Loh Gear Bikes could sell its bicycles to retailers either

Loh Gear 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.
Loh 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 $440 each. Assembling the bikes will increase direct materials by $10 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 Loh Gear sell or process further? Why or why not?



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  • CreatedJanuary 30, 2014
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