Barker Company has a single product called a Zet. The company normally produces and sells 87,000 Zets each year at a selling price of $42 per unit. The company’s unit costs at this level of activity are given below
|
Direct materials |
$ |
8.50 |
|
|
Direct labor |
9.00 |
||
|
Variable manufacturing overhead |
3.80 |
||
|
Fixed manufacturing overhead |
7.00 |
($609,000 total) |
|
|
Variable selling expenses |
4.70 |
||
|
Fixed selling expenses |
6.50 |
($565,500 total) |
|
|
Total cost per unit |
$ |
39.50 |
A number of questions relating to the production and sale of Zets are given below. Each question is independent.
Required:
Assume that Barker Company has sufficient capacity to produce 108,750 Zets each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 25% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $120,000.
(a)Calculate the incremental net operating income (Negative amount should be indicated with a minus sign. Do not round intermediate calculations.) Incremental net operating income $
b. Would the increased fixed selling expenses be justified?