Question

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Exercise 1-10 Differential Costs and Sunk Costs [LO1-5] Kubin Company's relevant range of production is 16,000 to 24,500 units. When it produces and sells 20,250 units, its average costs per unit are as follows: Amount per Unit 7.70 Direct materials Direct labor 4.70 2.20 Variable manufacturing overhead Fixed manufacturing overhead Fixed selling expense Fixed administrative expense 5.70 4.20 3.20 $ 1.70 1.20 Sales commissions Variable administrative expense Required: 1. What is the incremental manufacturing cost incurred if the company increases production from 20,250 to 20,251 units? 2. What is the incremental cost incurred if the company increases production and sales from 20,250 to 20,251 units? 3. Assume that Kubin Company produced 20,250 units and expects to sell 19,980 of them. If a new customer unexpectedly emerges and expresses interest in buying the 270 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 20,250 units and expects to sell 19,980 of them. If a new customer unexpectedly emerges and expresses interest in buying the 270 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 What is the incremental cost incurred if the company increases production and sales from 20,250 to 20,251 units? (Round your answers to 2 decimal places.) Direct materials Direct labor Variable manufacturing overhead Sales commissions Variable administrative expense $ Variable cost per unit sold 0.00

Answer 1

1)

Incremental manufacturing cost incurred = $14.6

Solution -

Direct material	$7.7
Direct labor	$4.7
Variable manufacturing overhead	$2.2
Total incremental cost	$14.6

The incremental manufacturing cost incurred when production increases from 20250 units 20251 units is $14.6

The fixed costs don't change because of change in production, so they are not included in incremental cost.

2)

Incremental cost = $17.5

Direct material	$7.7
Direct labor	$4.7
Variable manufacturing overhead	$2.2
Sales commission	$1.7
Variable administrative cost	$1.2
Total incremental cost	$17.5

OR

Incremental manufacturing cost	$14.6
(+) sales commission	$1.7
(+) variable administrative cost	$1.2
Total incremental cost	$17.5

The difference between the requirement 1 and requirement 2 is administrative and sales cost. That means, the first one is asking for only incremental manufacturing cost where as the other is asking for total incremental cost. So variable administrative and sales costs are added to get total incremental cost. Again, the fixed administrative and sales cost are not added as they don't change because of increased sales.

3)

The incremental manufacturing cost per unit incurred to sell the 270 units = $0

Solution -

The 20250 units are already produced by the company and out of these 20250 units when 270 units are sold to a new customer there is no increase in the manufacturing cost, because the cost related to manufacturing of these 270 units are also included in the cost relating to 20250 units.

4)

The incremental selling and administrative cost per unit = $2.9

Solution -

When 20250 units are produced and when unexpectedly a new customer asks for 270 units, to sell these 270 units the company incurs $2.9 ( sales commission of $1.7 per unit + variable administrative cost of $1.2 per unit). The fixed selling and administrative cost are not included as they remain same whether these 270 units are sold or not.