Question

Silverwood Company is considering the following alternatives: Alternative A Alternative B Revenues $100,000 $200,000 Variable costs 50,000 50,000 Fixed costs 10,000 30,000 What is the incremental profit

Answer 1

Assuming the Fixed costs are 10,000 30,000. The incremental profit is $80,000.

Incremental profit

First step

Alternative A

Revenues $100,000

Less Variable costs $50,000

Less Fixed costs $10,000

Profit $40,000

Alternative B

Revenues $200,000

Less Variable costs $50,000

Profit  $120,000

Second step

Incremental profit=$120,000 –$ 40,000

Incremental profit= $80,000

Therefore the incremental profit is $80,000.

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