Rachel Rey recently opened her own basketweaving studio. She sells finished bask

Question

Rachel Rey recently opened her own basketweaving studio. She sells finished baskets in addition to the raw materials needed by customers to weave baskets of their own. Rachel has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Rachel is unable to carry all varieties of kits originally assembled and must choose between two basic packages. The basic introductory kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic package costs Rachel $12 and sells for $24. The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit the customer need only soak the reeds and weave the basket. Rachel is able to produce the second kit by using the basic materials included in the first kit and adding one hour of her own time, which she values at $22 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Rachel is able to make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The Stage 2 kit sells for $33. Prepare an incremental analysis for the Rachel's basketweaving shop. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Determine whether Rachel's basketweaving shop should carry the basic introductory kit with undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut?

Explanation / Answer

Details Sell Process further Net income   Basic Kit 2nd stage kit Increase/(decrease) Sales per unit                                24                                    33 Cost Per unit Direct Materials                                12                                    12 Direct Labor                                 -                                      11 Total                                12                                    23 Net Income per unit                                12                                    10                                        (2) So the net income reduces if the baskets are processed further. Therefore, Rachel's basketweaving shop should carry the basic kit only.

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