Incremental analysis and project addition

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Reference no: EM13127167

Sales................................................................$950,000

Variable costs.................................................. 450,000

Fixed costs....................................................... 310,000

A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year.

A- Explain why the existing $310,000 of fixed costs is a sunk cost, while the $320,000 of fixed costs associated with the proposed addition is an out of pocket cost.

B- Calculate by how much the proposed addition will either increase or reduce operating income.

Reference no: EM13127167

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