Question

Anna Garden recently opened her basketweaving studio. She sells finished baskets in addition to selling the raw materials needed by customers to weave baskets of their own. Unfortunately, owing to space limitations, Anna is unable to carry all varieties of kits originally assembled and must choose between two essential packages. The Basic Kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic package costs Anna $18 and sells for $35. The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit, the customer need only soak the reeds and weave the basket. Anna produces the Stage 2 kit by using the materials included in the Basic Kit. Because she is more efficient at cutting and dying reeds than her average customer, Anna can produce two Stage 2 kits in one hour from one Basic Kit. (She values her time at $22 per hour.) The Stage 2 kit sells for $40

Answer 1

ANSWER:

Anna should carry the stage 2 units as they produce an increamental income of $3.

prepare an incremental analysis for the Anna's basketweaving studio.

	sell (basic kit)	process further (stage 2 kit)	net income increase (decrease)
sales per unit	35	40	5
cost per unit
direct materials	18	9	9
direct labour	0	11	(11)
total	18	20	(2)
net income	17	20	3

working:

direct material to process further =half of basic package cost (since two kits are made out of basic pack) =>$18/2=>$9

direct labour to process further = half of per hour value (since two kits are made in one hour)

=>$22/2=>$11.