Incremental analysis
Information regarding current operations of the Farrell Corporation is given below:
$$\begin{array} { | l | l | }
\hline \text { Sales } & \$ 950,000 \
\hline \text { Variable Costs } & \$ 450,000 \
\hline \text { Fixed Costs } & \$ 310,000 \
\hline
\end{array}$$ A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce operating income.

Question

Incremental analysis
Information regarding current operations of the Farrell Corporation is given below:
$$\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 950,000 \
\hline \text { Variable Costs } & \$ 450,000 \
\hline \text { Fixed Costs } & \$ 310,000 \
\hline
\end{array}$$ A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce operating income.

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The Answer of Incremental analysis
Information regarding current operations of the Farrell Corporation is given below:
$$\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 950,000 \
\hline \text { Variable Costs } & \$ 450,000 \
\hline \text { Fixed Costs } & \$ 310,000 \
\hline
\end{array}$$ A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce operating income.

Incremental Analysis Information Regarding Current Operations of the Farrell Corporation

Incremental Analysis
Information Regarding Current Operations of the Farrell Corporation