Question

Lakeside Inc. produces a product that currently sells for $64.80 per unit. Current production costs per unit include direct materials, $26; direct labor, $28; variable overhead, $13.00; and fixed overhead, $13.00. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit.
Required:
a. What would be the incremental profit or loss if Lakeside could sell the refined version of its product for $72 per unit? (Round your final answer to 2 decimal places. Loss amounts should be indicated with a minus sign.) Incremental Profit (Loss)
b. Should it be processed further?
Yes
No

Answer 1

Answer:

a. Incremental costs = (Direct materials + Direct labor) * 20%

Incremental costs = ($26 + $28) * 20%

Incremental costs = $54 * 20%

Incremental costs = $10.8

Incremental selling price = $72 - $64.8 = $7.2

Incremental profit (loss) = Incremental selling price - Incremental costs = $7.2 - $10.8 = $(3.6)

b. No. As there is Incremental loss, it should not be processed further