Kando company incurs a$12.00 per unit cost for product A. Which it currently man
ID: 2471467 • Letter: K
Question
Kando company incurs a$12.00 per unit cost for product A. Which it currently manufactures and sells for $13.50 per unit.Instead of manufacturing and selling this product the company can purchase product B for $7.00 per unit and sell it for $10.10 per unit if it does so,unit sales would remain unchanged and $7.00 of the $12.00 per unit cost assigned to assigned to product A would be eliminated. Prepare incremental cost analysis. should the company continue to manufacture product A or purchase product B for resale?Explanation / Answer
Incremental cost Analysis:
Manufacture Product A
Purchase Product B
Sales
$ 13.50
$ 10.10
Costs:
Avoidable Costs
$ 7.00
$ -
Unavoidable Costs
$ 5.00
$ 5.00
($12-$7)
Cost to purchase
$ 7.00
Total Costs
$ 12.00
$ 12.00
Net income = Sales - Total Costs =
$ 1.50
$ (1.90)
It is profitable to Manufacture Product A because it has positive Net income.
Hence , The company should Manufacture Product A
Incremental cost Analysis:
Manufacture Product A
Purchase Product B
Sales
$ 13.50
$ 10.10
Costs:
Avoidable Costs
$ 7.00
$ -
Unavoidable Costs
$ 5.00
$ 5.00
($12-$7)
Cost to purchase
$ 7.00
Total Costs
$ 12.00
$ 12.00
Net income = Sales - Total Costs =
$ 1.50
$ (1.90)
It is profitable to Manufacture Product A because it has positive Net income.
Hence , The company should Manufacture Product A
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