Lori Luthen recently opened her own basketweaving studio. She sells finished bas
ID: 2346866 • Letter: L
Question
Lori Luthen 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. Lori has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Lori 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 Lori $14 and sells for $28. 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. Lori 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 $20 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Lori is able to make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The kit of dyed and cut reeds sells for $35.
Complete an incremental analysis to determine whether Lori'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
Sell Process Further Net Income
(Basic Kit) (Stage 2 Kit) Increase (Decrease)
Sales per unit $28 $35 $7
Costs per unit
Direct materials $14 $7 $7
Direct labor $10 ($10)
$14 $17 $3
Net income PU $14 $18 $4
Lorry should carry the stage 2 kits processing as it generate incremental revenue of $7 that exceeds incremental cost $3 generating additional net income of $4.
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