Question

Kubin Company’s relevant range of production is 13,000 to 18,000 units. When it produces and sells 15,500 units, its average costs per unit are as follows: Amount per Unit Direct materials $ 7.40 Direct labor $ 4.40 Variable manufacturing overhead $ 1.90 Fixed manufacturing overhead $ 5.40 Fixed selling expense $ 3.90 Fixed administrative expense $ 2.90 Sales commissions $ 1.40 Variable administrative expense $ 0.90 Required: 1. What is the incremental manufacturing cost incurred if the company increases production from 15,500 to 15,501 units? 2. What is the incremental cost incurred if the company increases production and sales from 15,500 to 15,501 units? 3. Assume that Kubin Company produced 15,500 units and expects to sell 15,260 of them. If a new customer unexpectedly emerges and expresses interest in buying the 240 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 15,500 units and expects to sell 15,260 of them. If a new customer unexpectedly emerges and expresses interest in buying the 240 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	Production increases from 15500 to 15501 units.
	Incremental manufacturing cost incurred:
					$
	Direct materials				7.4
	Direct labor				4.4
	Variable manufacturing overhead				1.9
	Total				13.7
	Fixed expenses are irrelevant
2	Production and sales increases from 15500 to 15501 units.
	Incremental cost incurred:
					$
	Direct materials				7.4
	Direct labor				4.4
	Variable manufacturing overhead				1.9
	Sales commissions				1.4
	Variable administrative expenses				0.9
	Total				16
	Fixed expenses are irrelevant
3	Incremental manufacturing cost per unit=0
	Since the variable manufacturing overhead costs are already incurred and hence,they are sunk cost.
4	Incremental selling and administrative costs:
					$
	Sales commissions				1.4
	Variable administrative expenses				0.9
	Total				2.3
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