Question

Question 4

Anna Garden recently opened her own basketweaving studio. She sells finished baskets in addition to the raw materials needed by customers to weave baskets of their own. Anna has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Anna is unable to carry all varieties of kits originally assembled and must choose between two basic packages.

The basic introductory kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic package costs Anna $18 and sells for $32. The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit the customer need only soak the reeds and weave the basket. Anna is able to produce the second kit by using the basic materials included in the first kit and adding one hour of her own time, which she values at $28 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Anna is able to make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The Stage 2 kit sells for $41.

(a1)

Prepare an incremental analysis for the Anna’s basketweaving studio. (If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Sell (Basic Kit)		Process Further (Stage 2 Kit)		Net Income Increase (Decrease)
Sales per unit		$		$		$
Costs per unit
Direct materials		$		$		$
Direct labor
Total		$		$		$
Net income per unit		$		$		$

(a2)

Should Anna's basket weaving studio carry the basic introductory kit with undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut?

Anna should carry the  Basic KitStage 2 Kit.

Answer 1

SOLUTION

A1.

	Sell (Basic Kit)	Process Further (Stage 2 Kit)	Net Income Increase/ (Decrease)
Sales per unit	32	41	9
Cost per Unit:
Direct Materials	18	9	9
Direct Labor	0	14	(14)
Total	18	23	5
Net Income per unit	14	18	4

*Direct Materials = $18 / 2 = $9

Direct Labor = $28 / 2 = $14

A2. Anna should carry the Basic Kit Stage 2 Kit as the net income is increased by $4.