Posted: April 5th, 2016

Calculate the incremental net operating income

Barker Company has a single product called a Zet. The company normally produces and sells 84,000 Zets each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $ 7.50
Direct labor 10.00
Variable manufacturing overhead 3.80
Fixed manufacturing overhead 8.00 ($672,000 total)
Variable selling expenses 3.70
Fixed selling expenses 4.50 ($378,000 total)

Total cost per unit $ 37.50

A number of questions relating to the production and sale of Zets are given below. Each question is independent.

Required:
1. Assume that Barker Company has sufficient capacity to produce 100,800 Zets each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 20% above the present 84,000 units each year if it were willing to increase the fixed selling expenses by $110,000.

a. Barker Company has a single product called a Zet. The company normally produces and sells 84,000 Zets each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $ 7.50
Direct labor 10.00
Variable manufacturing overhead 3.80
Fixed manufacturing overhead 8.00 ($672,000 total)
Variable selling expenses 3.70
Fixed selling expenses 4.50 ($378,000 total)

Total cost per unit $ 37.50

A number of questions relating to the production and sale of Zets are given below. Each question is independent.

Required:
1. Assume that Barker Company has sufficient capacity to produce 100,800 Zets each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 20% above the present 84,000 units each year if it were willing to increase the fixed selling expenses by $110,000.

a. Calculate the incremental net operating income (Negative amount should be indicated with a minus sign. Do not round intermediate calculations.)

b. Would the increased fixed selling expenses be justified? (Negative amount should be indicated with a minus sign. Do not round intermediate calculations.)

b. Would the increased fixed selling expenses be justified?