Question

Lakeside Inc. produces a product that currently sells for $66.60 per unit. Current production costs per unit include direct materials, $27; direct labor, $29; variable overhead, $13.50; and fixed overhead, $13.50. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit.

Required:
a. What would be the incremental profit or loss if Lakeside could sell the refined version of its product for $74 per unit? (Round your final answer to 2 decimal places. Loss amounts should be indicated with a minus sign.)

Answer 1

Lakeside Inc. produces a product that currently sells for $66.60 per unit. Current production costs per unit include direct materials, $27; direct labor, $29; variable overhead, $13.50; and fixed overhead, $13.50.

These new production changes would increase material and labor costs by 20% per unit.

Increase in material cost = 20%

= 27 x 20%

= $5.40

Increase in labor cost = 20%

= 29 x 20%

= $5.80

Incremental costs = Increase in material cost + Increase in labor cost

= 5.40 + 5.80

= $11.20

Incremental revenue = Selling price of Refined version - Current selling price

= 74 - 66.60

= $7.40

Incremental loss if Lakeside could sell the refined version of its product for $74 per unit = Incremental revenue - Incremental costs

= 7.40 - 11.20

= - $3.80 per unit

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