Question

A company has the choice of either selling 1,000 unfinished units as is or completing them. The company could sell the unfinished units as is for $4.00 per unit. Alternatively, it could complete the units with incremental costs of $1.00 per unit for direct materials, $2.00 per unit for direct labor, and $1.50 per unit for overhead, and then sell the completed units for $8.00 each. If the company completes the units, what is the impact on income?

Multiple Choice

Income will increase by $4,000.

Income will increase by $500.

Income will decrease by $4,500.

Income will decrease by $500.

Income will increase by $8,000.

Answer 1

Selling price per unit of unfurnished units = $4

Selling price per unit of furnished units = $8

Incremental selling price per unit = Selling price per unit of furnished units - Selling price per unit of unfurnished units

= 8-4

= $4

Incremental Analysis
Incremental sales (1,000 x 4)	4,000
Incremental costs:
Direct materials (1,000 x 1)	-1,000
Direct labor (1,000 x 2)	-2,000
Overheads (1,000 x 1.5)	-1,500
Loss	-$500

If the company completes the units, income will decrease by $500.

fourth option is correct.

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