Wood You sells unfinished ladders for $20 each. Budgeted sales for 2011 is 5,400
ID: 2492240 • Letter: W
Question
Wood You sells unfinished ladders for $20 each. Budgeted sales for 2011 is 5,400 ladders. Each ladder requires 23 linear feet of wood to produce. The cost of wood is $0.25 per linear foot. Direct labor is $3.00 per ladder. Variable overhead and fixed overhead costs per unfinished ladder are $1.00 and $0.50 respectively. Wood You is considering whether it should paint the ladders so it can sell them for $25.00 each. It estimates it will sell 40% of the budgeted ladders as painted with the others unfinished. The direct costs of painting each ladder are $3.00. How much is the incremental effect on profit if the company paints the ladders?
$7,560
$10,800
$4,320
($5,400)
Explanation / Answer
Wood You Incremental profit analysis Without painting With Painting per unit Total per unit Total Total No of ladders sold unpainted 5,400 3,240 Total No of Ladder sold painted 2,160 Sales Revenue Unpainted 20.00 108,000 20.00 64,800 Sales Revenue Painted 25.00 54,000 Total Sales Revenue 108,000 118,800 Costs Direct Material(23ft @$0.25 per linear feet) 5.75 31,050 5.75 31,050 Direct Labor 3.00 16,200 3.00 16,200 Variable Overhead 1.00 5,400 1.00 5,400 Fixed overhead 0.50 2,700 0.50 2,700 Direct Cost of Painting - - 3 6,480 Total Cost 55,350 61,830 Net operating profit 52,650 56,970 Incremental profit on painting =(56970-52650)=$4,320 So correct option is $4,320
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