Bon Jovi Company manufactures 10000 units of wheel sets for

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.

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.