2. INCREMENTAL ANALYSIS Information regarding current operations of the Farrell Corporation is given below: Sales.... $950,000 Variable Costs.. $450,000 Fixed Costs.. $310,000 A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year. Variable costs are expected to be at the same percentage as they currently are before the proposed addition. a. Explain why the existing $310,000 of fixed costs is a sunk cost while the $320.00 of fixed costs associated with the proposed addition is an out-of-pocket cost. h Calculate by how much the proposed addition will either increase or reduce operating income. Show all work.
2. INCREMENTAL ANALYSIS Information regarding current operations of the Farrell Corporation is given below: Sales.... $950,000 Variable Costs.. $450,000 Fixed Costs.. $310,000 A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year. Variable costs are expected to be at the same percentage as they currently are before the proposed addition. a. Explain why the existing $310,000 of fixed costs is a sunk cost while the $320.00 of fixed costs associated with the proposed addition is an out-of-pocket cost. h Calculate by how much the proposed addition will either increase or reduce operating income. Show all work.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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FP2
Transcribed Image Text:2. INCREMENTAL ANALYSIS
Information regarding current operations of the Farrell Corporation is given below:
Sales...
$950,000
Variable Costs....
$450,000
Fixed Costs.....
$310,000
A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a
maximum of $750,000. The company's accountants have determined that the proposed addition
will add $320,000 to fixed costs each year. Variable costs are expected to be at the same
percentage as they currently are before the proposed addition.
a. Explain why the existing $310,000 of fixed costs is a sunk cost while the $320.000 of
fixed costs associated with the proposed addition is an out-of-pocket cost.
h Calculate by how much the proposed addition will either increase or reduce operating
income. Show all work.
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