Question

Cost Classifications (Algo)

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Kubin Company’s relevant range of production is 24,000 to 31,000 units. When it produces and sells 27,500 units, its average costs per unit are as follows:

  

	Average Cost per Unit
Direct materials	$	8.40
Direct labor	$	5.40
Variable manufacturing overhead	$	2.90
Fixed manufacturing overhead	$	6.40
Fixed selling expense	$	4.90
Fixed administrative expense	$	3.90
Sales commissions	$	2.40
Variable administrative expense	$	1.90

Exercise 1-10 (Algo) Differential Costs and Sunk Costs [LO1-5]

Required:

1. What is the incremental manufacturing cost incurred if the company increases production from 27,500 to 27,501 units?

2. What is the incremental cost incurred if the company increases production and sales from 27,500 to 27,501 units?

3. Assume that Kubin Company produced 27,500 units and expects to sell 27,160 of them. If a new customer unexpectedly emerges and expresses interest in buying the 340 extra units that have been produced by the company and that would otherwise remain unsold, what is the incremental manufacturing cost per unit incurred to sell these units to the customer?

4. Assume that Kubin Company produced 27,500 units and expects to sell 27,160 of them. If a new customer unexpectedly emerges and expresses interest in buying the 340 extra units that have been produced by the company and that would otherwise remain unsold, what incremental selling and administrative cost per unit is incurred to sell these units to the customer?

Answer 1

1 The incremental manufacturing cost incurred if the company increases production from 27,500 to 27,501 units as below

Particulars	Amount
Direct Material	8.40
Direct Labour	5.40
Variable Manufacturing Overhead	2.90
Incremental Cost for manufacturing additional 1 more Unit	16.70

2 The incremental cost incurred if the company increases production and sales from 27,500 to 27,501 units

Particulars	Amount
Direct Material	8.40
Direct Labour	5.40
Variable Manufacturing Overhead	2.90
Sales Commission	2.40
Variable Adminstrative Expenses	1.90
Incremental Cost for producing and selling   additional 1 more Unit	21.00

3 If a new customer unexpectedly emerges and expresses interest in buying the 340 extra units that have been produced by the company and that would otherwise remain unsold, the incremental manufacturing cost per unit incurred to sell these units to the customer is 0 . This is because  Kubin Company produced 27,500 units and the variable and fixed cost has already inccured and the units are already present in stock with Kubin Company.

4 The incremental selling and administrative cost per unit incurred to sell these units to the customer is as below

Particluars	Amount
Sales Commission	2.40
Variable Adminstrative Expenses	1.90
Sales and Adminstrative Expenses per unit	4.30
Additional Units Sold	340
Incremental Cost for selling 340 units	1462