Question

1. New equipment being considered by the Johnny Pickles Brewing Company is projected to increase current sales from $12850 to $14291. Direct labor resulting from increased production will go from $3732 to $4659. Direct material will increase from $4382 to $4903. Variable overhead is expected to stay the same at $961. The fixed expenses are expected to stay the same at $1038. What is the change to the Johnny Pickles Brewing Company net operating income if the brewery decides to proceed with the purchase of the new equipment? Increases in net operating income should be expressed as a positive number while decreases should be expressed as a negative number.

2. New equipment being considered by the Johnny Pickles Brewing Company is projected to increase current sales from $11355 to $12376. Direct labor resulting from increased production will go from $4015 to $5755. Direct material will increase from $3463 to $4037. Variable overhead is expected to stay the same at $563. The fixed expenses are expected to stay the same at $1170. What are the total differential direct labor costs for the Johnny Pickles Brewing Company if it decides to purchase the new equipment?

Answer 1

Part 1
Johnny Pickles Brewing Company
Income statement
	Current	Projected	Differential income(cost)
Sales	$ 12,850.00	$ 14,291.00	$             1,441.00
Less: Variable cost
Direct labor	$    3,732.00	$    4,659.00	$                 927.00
Direct material	$    4,382.00	$    4,903.00	$                 521.00
Incremental Income			$                   (7.00)

Decrease in Net Operating Income if Equipment is Purchased	$-7.00
Variable cost and fixed cost are same in both cases hence will not be taken into consideration.

Part 2
Johnny Pickles Brewing Company
Income statement
	Current	Projected	Differential income(cost)
Sales	$ 11,335.00	$ 12,376.00	$ 1,041.00
Less: Variable cost
Direct labor	$    4,015.00	$    5,755.00	$ 1,740.00
Direct material	$    3,463.00	$    4,037.00	$ 574.00
Incremental Income			$ (1,273.00)

Total Differential Direct Cost if Equipment is Purchased	$ 1,740.00
Variable cost and fixed cost are same in both cases hence will not be taken into consideration.