Question
Chavez could sell its tables to customers either assembled or unassembled. The cost of an unassembled table is as follows. Direct materials $150 Direct labor
Chavez could sell its tables to customers either assembled or unassembled. The cost of an unassembled table is as follows.
Direct materials $150
Direct labor 70
Variable overhead (70% of direct labor) 49
Fixed overhead (30% of direct labor) 21
Manufacturing cost per unit $290
The unassembled tables are sold to customer at $450 each.
Chavez currently has unused productive capacity that is expected to continue indefinitely; management has concluded that some of this capacity can be used to assemble the tables and sell them at $495 each. Assembling the tables will increase direct materials by $5 per table, and direct labor by $10 per table. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the tables.
Instructions
1. Prepare an incremental analysis for the sell-or-process-further decision.
2. Should Chavez sell or process further? Why or why not?
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