Question

2. Incremental costs are the additional costs incurred if a company pursues a certain course of action. True or False

15.

Benjamin Company had the following results of operations for the past year:

Sales (13,900 units at $18)				$	250,200
Direct materials and direct labor	$	69,500
Overhead (20% variable)		13,900
Selling and administrative expenses (all fixed)		20,850			(104,250	)
Operating income				$	145,950

A foreign company (whose sales will not affect Benjamin’s market) offers to buy 3,475 units at $14.40 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $930 and selling and administrative costs by $620. Assuming Benjamin’s productive capacity is 13,900 units per year and accepts the offer, its profits will:

Multiple Choice

Decrease by $12,510.

Decrease by $14,060.

Decrease by $ 133,440.

Increase by $ 10,960.

Increase by $ 4,095.

Answer 1

• Yes, it is true that the additional costs are the costs incurred if a company pursues a certain couse of action.

Question 15

Note 1

Production capacity of the company = 13,900 units

LESS: Number of units produced for the special order [from the foreign compnay] = 3,475 units

Number of units produced other than for the special order 10,425 units

Calculation of profit:

	10,425 units (A)	[Incremental revenue and cost] 3,475 units (B)	Total (A) + (B)
Sales	$187,650 [10,425 units x $18]	$50,040 [3,475 units x $14.40]	$237,690
LESS: Direct materials and direct labor Please refer Note 2]	$52,125 [10,425 units x $5]	$17,375 [3,475 units x $5]	($69,500)
LESS: Overhead: [Please refer Note 2]
Variable overhead	$2,085 [10,425 x $0.2]	$695 [3,475 units x $0.2]	($2,780)
Fixed overhead	$11,120	$930 [Incremental cost]	($12,050)
LESS: Selling and administrative expenses	$20,850	$620 [Incremental cost]	($21,470)
Operating Income	$101,470	$30,420	131,890

Assumption : The selling price per unit is $18 in the current year also.

Note 2 Calculation of Direct material and direct labor cost per unit:

a. Direct material and direct labor cost in the past year = $69,500

b. Number of units sold in the past year = 13,900 units

Therefore direct material and direct labor cost per unit [a/b] = $5 per unit

Note 3 Calculation of fixed overhead and variable overhead cost per unit:

a. Number of units produced and sold = 13,900 units

b. Total overhead cost in the past year = $13,900

c. Percentage of variable cost in the total overhead cost = 20%

d. Therefore, Variable overhead cost [b x c] = $2,780

e. Therfore, Fixed overhead cost [b - c] = $11,120 (OR) $13,900 x 80%

f. Therefore variable overhead cost per unit [d/a] = $0.2 per unit

Conclusion

a. Profit during the past year = $145,950

b. Profit during the current year = $131,890

c. Difference $14,060

Therefore, the operating income of the company DECREASES BY $14,060 because of the special order from the foreign company.