Joy is a bike manufacturer. It manufactures both bike components and finished bi

Question

Joy is a bike manufacturer. It manufactures both bike components and finished bike. For a specific type of bikes, the manufacturer can sell the components to an assembly company for $12 per set, or assemble the bikes itself. The finished bikes can be sold for $17 each. Joy's has a total capacity of 500,000 hours, which could be used for both producing bike components and assembling. One capacity hour can be used to produce 30 sets of bike components or to assemble 15 units of bikes. All the related costs for the manufacturing and assembling are listed below. No other costs and tax are considered. The manufacturing overhead cost is fixed and allocated to the units produced based on their production time. We assume that the demand is high enough so that the manufacturing capacity is always utilized fully. The direct materials, direct labor and manufacturing overhead for each set of bike components are $4.60, $3.00 and $1.00, respectively. The additional direct materials, direct labor and manufacturing overhead for each unit of assembly are $1.20, $0.50 and $2.00, respectively. (1) The Joy's executives decide to assemble the bikes themselves instead of selling the components. With the expected sale price of $17 per unit, is this a good decision? (2) What is the lowest price for the completely assembled (finished) bikes that will be acceptable for the executives’ decision? (3) The manufacturing overhead cost in (1) and (2) is a fixed cost allocated to each unit. Suppose that 50% of that fixed overhead cost is variable. Please reevaluate your answers in (1) and (2).

Explanation / Answer

All Amounts in $ (1) Cost per set of bike components 8.6 Additional materials per set 3.7 Total Cost 12.3 Selling Price per bike (Finished) 17 Profit per bike 4.7 Since there is a profit of $ 4.70 per bike after making additional changes, hence it can be considered as a good decision. (2) The lowest price for the completely assembled bikes which will completely justify the executives' decision is $ 12.30 as shown in (1) above. (3) If 50% of the overhead costs are variable, then Cost per set of bike components 8.1 Additional materials per set 2.7 Total Cost 10.8 Selling Price per bike (Finished) 17 Profit per bike 6.2 The lowest price for the completely assembled bikes which will completely justify the executives' decision is $ 10.80 as shown in (3) above.

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