Question

Wilmington Chemicals produces a chemical, PX44, which is used to retard fading in exterior house paint. In the past year, the company produced 200,000 gallons at a total cost of $1,200,000 ($6 per gallon). The company is currently considering an order for 15,000 gallons from a paint company in Canada. (To date, Wilmington has not sold the product in markets outside the United States.) Explain why the incremental cost associated with this order is likely to be less than $90,000.

Answer 1

The costs should ideally be less than 90000 because in manufacturing there are always two types of costs: fixed and variable.

Since per unit Costs is 6$ out of which some would be variable and some would be fixed.

Since fixed costs have already occured, they will not occur again for further manufacturing. So, for the incremental order, only variable costs should occur. And it should be less than 6.

So, costs of 15000 incremental units should be less than 15000*6 = 90000