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Donkey Bikes - Incremental Analysis

Donkey Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows.

Direct material $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.
a) Prepare an incremental analysis for the sell-or-process-further decision.
b) Should Donkey sell or process further? Why or why not?

Please provide details for understand the exercise.

Solution Preview

Donkey Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows.

Direct material $150
Direct Labor 70
Variable overhead (70% of direct labor) 49
Fixed overhead (30% of direct labor ) 21
Manufacturing cost per ...

Solution Summary

This solution is comprised of a detailed explanation to prepare an incremental analysis for the sell-or-process-further decision.

$2.19