Question

Savings, Inc. produces a single product, piggy banks. The costs of producing and selling a single product at the current activity level of 8,000 units per month are as follows:

Direct materials $2.50

Direct labor 3.00

Variable manufacturing overhead 0.50

Fixed manufacturing overhead 4.25

Variable selling expenses 1.50

Fixed selling and administrative expenses 2.00

The normal selling price is $15 per bank. The production capacity for Savings, Inc. is 10,000 banks per month. An order has been received from a potential overseas customer for 2,000 banks at a price of $12.00 per bank. This order would not affect regular sales. How much will monthly profits change if the order is accepted?

Answer 1

Incremental analysis

Incremental revenue (2000*12)	24000
Incremental cost
Direct material (2000*2.50)	5000
Direct labor (2000*3)	6000
variable manufacturing overhead	1000
Variable selling expense	3000
Total incremental cost	15000
Incremental profit (loss)	9000

Profit increase by $9000