Question

Q 20.27: Liberty Bicycles currently sells unassembled bikes for $240 each. The variable production costs for each bike are $35 and the fixed production costs are $72. Liberty is thinking about selling the bikes fully assembled for $300 each. The variable costs for assembling one bike will be $18 and the fixed costs will be $31. Given these figures, Liberty will increase its net income per unit by ________ if it opts to assemble the bikes.

Answer 1

Answer:

$11

Explanation:

Find the incremental effect on net income of assembling the bikes as follows :

Incremental analysis for assembling the bikes per unit

Sales ( $300 - $240)                    $60

Less incremental costs :

Variable costs                               ($18)

Fixed production costs                 ($31)

Incremental Income/(loss)              $11

Conclusion

Thus  Liberty will increase its net income per unit by $11  if it opts to assemble the bikes.