If demand for 2022 is instead 2,500 units should the company pay to increase their capacity? Why? Please explain your calculations and reference to the chart in Figure 1. Assume units are sold at the normal price. Please mention the concept of incremental profits.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Sales
Variable Costs
Contribution Margin
Fixed Costs
Operating Income
Total at 2,000 UnitⓇer Unit
800,000
321,000
479,000
182,000
279,000
400
160.50
239.50
Transcribed Image Text:Sales Variable Costs Contribution Margin Fixed Costs Operating Income Total at 2,000 UnitⓇer Unit 800,000 321,000 479,000 182,000 279,000 400 160.50 239.50
3) If demand for 2022 is instead 2,500 units should the company pay to increase their capacity? Why? Please explain your
calculations and reference to the chart in Figure 1. Assume units are sold at the normal price. Please mention the concept of
incremental profits.
Hint: If you expand capacity, you will have to pay additional fixed costs of $25,000. Remember that fixed costs are fixed within the
relevant range. If you expand capacity then you are outside this range. If you expand capacity then you can make revenue on 500
additional units at the normal price and would pay variable costs on 500 additional units. Please consider the incremental profit or loss
of expanding capacity. The incremental profit is the increase in revenues minus the increase in costs of adding 500 more units. If the
incremental profit of expanding capacity is positive then you should do so.
Transcribed Image Text:3) If demand for 2022 is instead 2,500 units should the company pay to increase their capacity? Why? Please explain your calculations and reference to the chart in Figure 1. Assume units are sold at the normal price. Please mention the concept of incremental profits. Hint: If you expand capacity, you will have to pay additional fixed costs of $25,000. Remember that fixed costs are fixed within the relevant range. If you expand capacity then you are outside this range. If you expand capacity then you can make revenue on 500 additional units at the normal price and would pay variable costs on 500 additional units. Please consider the incremental profit or loss of expanding capacity. The incremental profit is the increase in revenues minus the increase in costs of adding 500 more units. If the incremental profit of expanding capacity is positive then you should do so.
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