The management of Dude Skis wants to know how much it will cost to increase production of its Drag Knuckle Skis from 5,000 units to 8,000 units, so that it can sell the additional 3,000 skis for a wholesale price (in aggregate) of $900,000. The most obvious direct cost is the cost of the wood core and graphite laminate used in the skis, at a cost of $150 per pair of skis. In addition, the company will require three additional staff whose labor cost will be $25 per pair of skis. Finally, the company must lease a lamination machine for $30,000, which it can then return to the lessor after the production run is complete.
For the purposes of this specific production increase decision, then, the associated direct costs are:
|
Incremental revenue |
$900,000 |
|
Cost of materials ($150 x 3,000 units) |
450,000 |
|
Cost of labor ($25 x 3,000 units) |
75,000 |
|
Cost of lamination machine |
30,000 |
|
Total of all direct costs |
555,000 |
|
Contribution margin |
$355,000 |