Question

Kubin Company’s relevant range of production is 28,000 to 31,500 units. When it produces and sells 29,750 units, its average costs per unit are as follows:

  

	Amount per Unit
Direct materials	$	8.80
Direct labor	$	5.80
Variable manufacturing overhead	$	3.30
Fixed manufacturing overhead	$	6.80
Fixed selling expense	$	5.30
Fixed administrative expense	$	4.30
Sales commissions	$	2.80
Variable administrative expense	$	2.30

Required:

1. What is the incremental manufacturing cost incurred if the company increases production from 29,750 to 29,751 units?

2. What is the incremental cost incurred if the company increases production and sales from 29,750 to 29,751 units?

3. Assume that Kubin Company produced 29,750 units and expects to sell 29,370 of them. If a new customer unexpectedly emerges and expresses interest in buying the 380 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 29,750 units and expects to sell 29,370 of them. If a new customer unexpectedly emerges and expresses interest in buying the 380 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. Incremental Manufacturing cost per unit = Direct Materials + Labor + Variable manufacturing overheads.

= 8.80 + 5.80 + 3.30 = $17.90 per unit

Incremental manufacturing cost of producing 19751 units = $17.90

2. Total Incremental costs for producing & selling one extra unit = Material + Labor + Variable Manufacturing overheads + Sales commission + Variable admin expenses

= 8.80 + 5.80 + 3.30 + 2.80 + 2.30 = $23 per unit

3. In the given case, company has already produced 29,750 units and therefore it has already incurred the mannufacturing cost on such extra units. If a customer desires to buy these extra units then such extra units will have no further manufacturing costs as they have already produced. This is now sunk cost and is not relevant.

Hence manufacturing cost of such extra 380 units will be $0.

4. Such 380 units will not have any manufacturing cost but they are having selling costs when sold to customer and as a result ll the variable selling and admin costs are relevant.

Incremental selling & Admin Cost = $2.80 + 2.30 = $5.1 per unit.

Fixed costs will remain the same irrespective of the level of output till 31,500 units and therefore, are not be included as they are not incurred incrementally as sale or production increases.