Reference no: EM132944310
AnthonyWalker operates a small machine shop. He manufactures one standard product that is also available from many other similar businesses, and he also manufactures deluxe products to order.
His accountant prepared the following annual income statement:
Deluxe Sales Standard Sales Total
Sales $60,500 $30,250 $90,750
Costs
Material 12,100 9,680 21,780
Labour 24,200 10,890 35,090
Depreciation 7,623 4,356 11,979
Power 847 484 1,331
Rent 7,260 1,210 8,470
Heat and light 726 120 846
Other 484 1,090 1,574
Total costs 53,240 27,830 81,070
Net income $7,260 $2,420 $9,680
- The depreciation charges are for machines used in the product lines. The power charge is apportioned based on an estimate of the power consumed by each line. The rent is for the building space, which has been leased for 10 years at $8,470 per year. The rent and the heat and light costs are apportioned to the product lines based on the amount of floor space occupied by each line. All other costs are current expenses that are identified with the product line causing them.
- A valued customer has asked Mr. Walker if he would manufacture 6,050 of the deluxe products for him. Mr. Walker is working at capacity and would have to give up some other business in order to take this order. He cannot cancel deluxe orders he has already agreed to, so he would have to reduce the output of his standard product by about one-half for a year while producing the requested deluxe product. The customer is willing to pay $7.00 for each unit. The material cost will be about $2.00 per unit and the labour will be $3.60 per unit. Mr. Walker will have to spend $2,420 for a special device that will be discarded when the job is done.
Problem 1: Calculate the incremental cost of the order.