Keaton Inc. makes unfinished bookcases that it sells for $57.56. Production cost
ID: 2484012 • Letter: K
Question
Keaton Inc. makes unfinished bookcases that it sells for $57.56. Production costs are $30.39 variable and $9.42 fixed. Because it has unused capacity, Keaton is considering finishing the bookcases and selling them for $72.15. Variable finishing costs are expected to increase by $7.07 per unit with no increase in fixed costs. Prepare an analysis on a per unit basis showing whether Keaton should sell unfinished or finished bookcases.
Sell
Process
Further
(Decrease)
$
$
$
$
$
$
Sell
Process
Further
(Decrease)
Sales per unit$
$
$
Cost per unit Variable Fixed Total Net income per unit$
$
$
Explanation / Answer
Solution:
Statement of Analysis Per Unit basis
Sell
Process Further
Net Income Increase / (Decrease)
Sales Per Unit
$57.56
$72.15
Cost Per Unit
Variable
$30.39
$37.46
Fixed (Note 1)
-
-
Total
$30.39
$37.46
Net Income Per Unit
$27.17
$34.69
$7.52
If Keaton Inc process further and sell, the net income of Keaten Inc will be increased by $7.52 per unit
Note 1 --- there will be no increase in fixed cost if Keaton Inc processing further. Hence fixed cost is irrelevant for this decision making. Whether company do or not to do further processing, fixed cost will remain constant. There is a rule of decision making, the cost which remain same under each alternative course of action is a IRRELEVANT COST for decision making. Hence fixed cost is irrelevant for the decision which remain constant. Hence it is ignored while calculating the Net Income per unit under alternative course of action.
Sell
Process Further
Net Income Increase / (Decrease)
Sales Per Unit
$57.56
$72.15
Cost Per Unit
Variable
$30.39
$37.46
Fixed (Note 1)
-
-
Total
$30.39
$37.46
Net Income Per Unit
$27.17
$34.69
$7.52
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