Incremental Costs . Electron Control, Inc., sells voltage regulators to other ma
ID: 1132977 • Letter: I
Question
Incremental Costs. Electron Control, Inc., sells voltage regulators to other manufacturers, who then customize and distribute the products to quality assurance labs for their sensitive test equipment. The yearly volume of output is 15,000 units. The selling price and cost per unit are shown below
Selling price
$200
Costs:
Direct material
Direct labor
$35
Variable overhead
50
Variable selling expenses
25
Fixed selling expenses
25
Unit profit before tax
15
150
$ 50
Management is evaluating the alternative of performing the necessary customizing to allow Electron Control to sell its output directly to Q/A labs for $275 per unit. Although no added investment is required in productive facilities, additional processing costs are estimated as:
Direct labor
$25 per unit
Variable overhead
$15 per unit
Variable selling expenses
$10 per unit
Fixed selling expenses
$100,000 per year
Calculate the incremental profit Electron Control would earn by customizing its instruments and marketing directly to end users.
Selling price
$200
Costs:
Direct material
Direct labor
$35
Variable overhead
50
Variable selling expenses
25
Fixed selling expenses
25
Unit profit before tax
15
150
$ 50
Explanation / Answer
No. Of units produced annually =15000
Profit on selling price of 200 is 50 per unit.
So total profit earned is 15000x50= 7, 50,000
If they sell it @ 275 to Q/A labs then :
Added variable Expense=50 per unit
Total variable expense = 150 + 50 = 200 per unit.
Total profit per unit = Selling price – Cost price = 275 - 200 = 75 per unit
Added profit per unit= Total profit –profit on SP of 200 = 75 – 50=2 5
Total Profit= 75X15000 =11, 25,000
Net profit = Total profit – Fixed selling expenses.
Net profit =11, 25,000 - 1, 00,000 =10, 25,000.
Incremental profit= 10, 25,000 - 7, 50,000= 2, 75,000.