Speedy 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 $450 each.

Speedy 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 $495 each. Assembling the bikes will increase direct materials by $5 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.

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.

Required:
a. Prepare an incremental analysis for the sell-or-process-further decision.
b. Should Speedy sell or process further?

Why or why not?

Speedy Bikes

a. Incremental Analysis for the sell-or-process-further decision:

                                                       Cost of an              Cost an    Difference

                                                   unassembled bike  assembled bike

                                                     Alternative 1          Alternative 2 Increment

Sales price of unassembled bike      $450                     $495           $45

Manufacturing cost per unit              $290                      $312            (22)

Net operating income                        $160                       $183           $23

b. Speedy should process the bikes further.

c. It will generate an incremental net operating income of $23 per bike.

Explanation:

a) Data and Calculations:

                                                       Cost of an              Cost an

                                                   unassembled bike  assembled bike

Direct materials                                    $150                      $155

Direct labor                                               70                         80

Variable overhead (70% of direct labor) 49                         56 ($80 * 70%)

Fixed overhead (30% of direct labor)      21                          21

Manufacturing cost per unit               $290                      $312