Sol Ltd. manufactures unfinished chairs that sell for $48.09 each and cost $20.0

Question

Sol Ltd. manufactures unfinished chairs that sell for $48.09 each and cost $20.00 to make. It currently produces 9484 chairs per year. The company has been considering finishing the chairs, which it could then sell the chairs for $60.56 each. However, it has been determined that only 7894 finished chairs could be sold; the other 1590 chairs would continue to be sold unfinished.

Costs per chair associated with processing further are:

Direct materials

$5.46

Direct labour

14.32

Variable overhead

3.24

Fixed overhead

4.94

If the company decides to process further, the incremental profit (loss) would be:

Direct materials

$5.46

Direct labour

14.32

Variable overhead

3.24

Fixed overhead

4.94

Explanation / Answer

Calculate incremental profit (loss)

so incremental loss is (16774.50)

Sale after further processing (1590*60.56) 96290.40 Sale at split off point (1590*48.09) 76463.10 Incremental revenue 19827.30 Less: Additonal cost (23.02*1590) (36601.80) Incremental profit (16774.50)

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