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.

(a) Prepare an incremental analysis for the sell-or-process-further decision.
(b) Should Loh Gear sell or process further? Why or why not?

  • CreatedJanuary 30, 2014
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