Question

The company is now using only 70% of its normal capacity; it could fully use its normal capacity by processing the assembly further and selling it for $51 per unit. If the company does this, material and labor costs will each increase by $2 per unit and variable overhead will go up by $1 per unit. Fixed costs will increase from the current level of $160,000 to $225,000. Prepare an analysis showing whether Jensen should process the assemblies further.

Use a negative sign with answer to only indicate a loss from processing assemblies further; otherwise do not use negative signs with your answers.
Sell of Process Further Differential Analysis
Differential revenue
Differential costs
Direct material
Direct labor
Variable overhead
Fixed costs
Additional income (loss) from processing further $

Answer 1

Question Completion:

Jensen Manufacturing Company makes a partially completed assembly unit that it sells for $36 per unit. Normally, 42,000 units are sold each year. Variable unit cost data on the assembly are as follows:

Direct material $10

Direct labor 8

Variable manufacturing overhead 4

Answer:

Jensen Manufacturing Company

Sell or Process Further Differential Analysis

Differential revenue $630,000

Differential costs

Direct material -84,000

Direct labor -84,000

Variable overhead -42,000

Fixed costs -65,000

Additional income (loss) from processing further $355,000

Step-by-step explanation:

a) Data and Calculations:

Sell Process Further Difference

Sales price per unit $36 $51 $15

Costs:

Direct material $10 12 2

Direct labor 8 10 2

Variable manufacturing

overhead 4 5 1

Fixed costs $160,000 $225,000 $65,000

Normal annual production and sales = 42,000 units

Differential revenue = $630,000 ($15 * 42,000)

Differential costs:

Differential direct material cost = $84,000 ($2 * 42,000)

Differential direct labor cost = $84,000 ($2 * 42,000)

Differential overhead cost = $42,000 ($1 * 42,000)

Differential fixed cost = $65,000 ($225,000 - $160,000)

Total differential costs = $275,000

b) Jensen Manufacturing should process the assembly units further as it will gain additional $355,000 income by so doing.