Christensen Mfg. produces leather strips for use in making bridles for horses. It normally sells 12,000 feet of one inch strips annually for $72,000. Variable costs for the leather strips are as follows:
Direct material $18,000
Direct labor 40,000
Variable manufacturing overhead 12,000
Christensen is currently using 80% of its normal capacity. Christensen is considering using the other 20% to process the leather further and produce its own finished bridles. Each bridle would use 10 feet of leather strip. Christensen estimates that it could sell the finished bridles for $80. Christensen would incur additional material and labor costs of $10 per bridle and additional variable overhead costs of $4 per bridle. Additional equipment required would increase fixed overhead costs by $2,500 per year.
What would the annual incremental income or loss be if Christensen produces the bridles?
A) $ 700 incremental income
B) $ 700 incremental loss
C) $1,800 incremental income
D) $1,800 incremental loss
E) None of the above

Question

Quizplus · Accepted Answer

Production Capacity (X):
12,000 ft. = 80% X
12,000 / 80% = X
15,000 = X = Production Capacity
Production Capacity 15,000 feet
Less Production (12,000) feet
Excess Capacity 3,000 feet
/ Feet per Bridle 10 feet
Bridle Excess Capacity 300 Bridles
 11ee472f_eee1_4656_a6cd_ab66aafd207e_TBCB1009_00 *$72,000/12,000 feet = $6 per foot x 10 feet = $60 per bridle