Question

Kubin Company’s relevant range of production is 15,000 to 19,000 units. When it produces and sells 17,000 units, its average costs per unit are as follows:

  

	Amount per Unit
Direct materials	$	7.60
Direct labor	$	4.60
Variable manufacturing overhead	$	2.10
Fixed manufacturing overhead	$	5.60
Fixed selling expense	$	4.10
Fixed administrative expense	$	3.10
Sales commissions	$	1.60
Variable administrative expense	$	1.10

Required:

1. What is the incremental manufacturing cost incurred if the company increases production from 17,000 to 17,001 units?

2. What is the incremental cost incurred if the company increases production and sales from 17,000 to 17,001 units?

3. Assume that Kubin Company produced 17,000 units and expects to sell 16,740 of them. If a new customer unexpectedly emerges and expresses interest in buying the 260 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 17,000 units and expects to sell 16,740 of them. If a new customer unexpectedly emerges and expresses interest in buying the 260 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

Solution:

Given data

Direct materials		$7.60
Direct labor		$4.60
Variable manufacturing overhead		$2.10
Fixed manufacturing overhead		$5.60
Fixed selling expense		$4.10
Fixed administrative expense		$3.10
Sales commissions		$1.60
Variable administrative expense		$1.10

Answer for 1.  

Direct materials	$7.6
Direct labour	$4.6
Variable manufacturing overhead	$2.1
Incremental manufacturing cost:	$14.3

Explaination: For the manufacture of an additional 1 unit requires only variable cost, i.e, raw material , labour and variable manufacturing cost . Fixed manufacturing overhead remains same for 17,000 units and 17,001 units.

Answer for 2.

Incremental manufacturing cost	$14.3
variable administrative expenses	$ 1.1
Sales commisions	$ 1.6
Incremental cost incurred	$17.0

Explaination: Here incremental cost is required for production and sale . So we included the selling and administrative cost as well, but only variable . Because fixed remains same and does not increase to produce one more unit.

Answer for 3.

  

Direct materials	$1976
Direct labour	$1196
Variable manufacturing overhead	$ 546
Fixed manufacturing overhead	$1456
Total cost for 260 units	$5174
Incremental cost per unit	$19.9

Answer for 4.

For a customer who directly approches the company , there will not be any sales commission (variable)

Fixed selling expenses	$4.1
Fixed administrative expenses	$3.1
Variable adminstrative expenses	$1.1
Commission sales	$0
Incremental selling and admin cost per unit	$8.3