Question

Bon Jovi Company manufactures 10,000 units of wheel sets for use in its annual production. Costs are as follows: direct materials are $20,000; direct labor is $55,000; variable overhead is $45,000; and fixed overhead is $70,000. Bowie Company has offered to sell Bon Jovi 10,000 units of wheel sets for $17 per unit. If RSW accepts the offer, some of the facilities presently used to manufacture wheel sets could be rented to a third party at an annual rental of $20,000. Additionally, $4 per unit of the fixed overhead applied to wheel sets would be totally eliminated.

Requirements: Prepare an incremental analysis schedule to demonstrate if Bon Jovi should accept Bowie's offer.

Answer 1

Incremental analysis schedule
Cost to Bon Jovi Company
PARTICULARS	Total Cost		Per Unit = (Total Cost /Total no of Units)
DIRECT MATERIALS	$      20,000.00		$20000/$10000 = $2
DIRECT LABOR	$      55,000.00		$55000/$10000 = $5.5
VARIABLE OVERHEAD	$      45,000.00		$45000/$10000 = $4.5
FIXED OVERHEAD	$      70,000.00		$4
Total	$ 1,90,000.00		$16
Fixed Overhead Remain Constant	=		$16*$1000 = $160000
	=		$190000-$160000 = $30000
PARTICULARS	Bon Jovi		Bowie Company
DIRECT MATERIALS	$      20,000.00		-
DIRECT LABOR	$      55,000.00		-
VARIABLE OVERHEAD	$      45,000.00		-
FIXED OVERHEAD [Variable]	$      40,000.00		-
FIXED OVERHEAD [Constant]	$      30,000.00		$        30,000.00
Purchased [10000*17]	-		$    1,70,000.00
Total Cost	$ 1,90,000.00		$    2,00,000.00
Less : Rental Income	-		$       20,000.00
Net Cost	$ 1,90,000.00		$    1,80,000.00
Offer from Bowie Company should be accepted as there is benefit of $10000.