1. Speedy Bikes currently sells its bicycles to retailers unassembled for $450 each. The cost to manufacture an
unassembled bike is as follows.
Direct materials
$150
Direct labor
70
Variable overhead
49
Fixed overhead
21
Manufacturing cost per unit $290
Speedy currently has unused productive capacity and management has concluded that some of this capacity
could be used to assemble the bikes and instead sell them to retailers for $495 each.
Assembling the bikes will increase direct materials by $5 per bike, and direct labor by $10 per bike.
Additional variable overhead cost will be $7 per bike, but there will be no additional fixed overhead as a result
of assembling the bikes. Prepare an analysis to determine if the bikes should be sold as is (unassembled) or
processed further and sold as assembled bikes.
2. Toby's Treats owns a machine that produces baskets for the gift packages the company sells. The company
uses 900 baskets in production each month. The cost of making one basket is $4 for direct materials, $4 for
variable manufacturing overhead, $3 for direct labor, and $6 for fixed manufacturing overhead. The unit cost
is based on the monthly production of 900 baskets. The company determined that 45% of the fixed
manufacturing overhead is avoidable. An outside supplier has offered to sell Toby's Treats the baskets for
$12 each, and can supply all the units it needs. Prepare an incremental analysis to determine if the company
should buy the baskets from the supplier. Calculate the impact on Net Income if 900 baskets were
purchased from the outside supplier, and indicate whether or not Toby's Treats should make or buy the
baskets.
