Question

Keep Your Memories manufactures pre-made scrapbook pages for scrapbookers who don't have time to create their own pages. The clients need only insert their pictures on the pages. It currently sells a child's scrapbook with pre-made pages for $56. Production costs are $24 variable and $14 fixed. The company is considering creating scrapbook kits instead to save labour costs. They are expecting to sell these kits for $46 each and save $11 in variable costs. Prepare an incremental analysis. (If an amount reduces the net income then enter with a negative sign preceding the number e.g. -45,000 or parenthesis, e.g. (45,000).) Pre-made pages Kits Incremental revenue and costs Direct materials per unit $ Revenue per unit Purchase price per unit Net income / (loss) per unit Should the company begin to sell kits or continue to sell pre-made scrapbooks?

Answer 1

Particulars	Premade pages	Kits	Incremental Revenue and costs
Direct Material p.u	$38 ($24+14)	$27 ($24-$11+$14)	$11
Revenue p.u	$56	$46	-$10
Net income/(loss) p.u	$18	$19	$1

The above Calculation is made on the basis of absorption Costing Technique, as no details given regarding fixed overheads clearly.

Alternatively you could take Purchase Cost as fixed overhead.

Either way you get the same solution.

The company should sell kits as it gives additional income of $1 for every unit sold, but only after considering total units to be sold.