Bon Jovi Company manufactures 10,000 units of wheel sets for use in its annual production. Costs...

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.

Expert Solution

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.

ekkarill92 answered 2 years ago

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