Question

Kubin Company’s relevant range of production is 22,000 to 27,000 units. When it produces and sells 24,500 units, its average costs per unit are as follows:

  

	Amount per Unit
Direct materials	$	8.20
Direct labor	$	5.20
Variable manufacturing overhead	$	2.70
Fixed manufacturing overhead	$	6.20
Fixed selling expense	$	4.70
Fixed administrative expense	$	3.70
Sales commissions	$	2.20
Variable administrative expense	$	1.70

Required:

1. What is the incremental manufacturing cost incurred if the company increases production from 24,500 to 24,501 units?

2. What is the incremental cost incurred if the company increases production and sales from 24,500 to 24,501 units?

3. Assume that Kubin Company produced 24,500 units and expects to sell 24,180 of them. If a new customer unexpectedly emerges and expresses interest in buying the 320 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 24,500 units and expects to sell 24,180 of them. If a new customer unexpectedly emerges and expresses interest in buying the 320 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. What is the incremental manufacturing cost incurred if the company increases production from 24,500 to 24,501 units?

DM 8.2 + DL 5.2 + Variable Mfg. OH 2.7 = $ 16.1

manufacturing cost includes material, labour and overhead. Here fixed overhead is not taken because the production is within the relevant range i.e  22,000 to 27,000 units and therefore, there is no increase in fixed overhead.

2. What is the incremental cost incurred if the company increases production and sales from 24,500 to 24,501 units?

DM 8.2 + DL 5.2 + Variable Mfg. OH 2.7 = $ 16.1 ( for production )

sales comm. 2.2 + variable adm. exp. 1.7 = $ 3.9 ( for sales )

Total = 16.1 + 3.9 = $ 20

3. Assume that Kubin Company produced 24,500 units and expects to sell 24,180 of them. If a new customer unexpectedly emerges and expresses interest in buying the 320 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?

$ 0 as 320 units are already produced.

4. Assume that Kubin Company produced 24,500 units and expects to sell 24,180 of them. If a new customer unexpectedly emerges and expresses interest in buying the 320 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?

sales comm. 2.2 + variable adm. exp. 1.7 = $ 3.9