incremental analysis
incremental analysis
Current Designs will need to produce 3,000 seats this year; 25% of the fixed overhead will be avoided if the seats are
purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will
cost $50 to purchase a seat from an outside vendor.
Instructions
(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating
System."
(b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to
produce income of $20,000?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .
Situation 1
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
Net Income
Reject Order
Accept Order
Increase (Decrease)
Revenues
Value
?
Value
Costs
Net income
Value
?
Value
?
?
?
Response:
(b)
Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.
Response:
Situation 2
(a)
Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven,
assuming that the average price for natural gas over the next 10 years will be $0.65 per therm.
Variable mfg. costs
New oven costs
Proceed from
scrapping old oven
Total
Retain Oven
?
Value
Replace Oven
?
Value
Net Income
Increase
(Decrease)
?
?
Value
Value
?
?
?
?
Response:
(b)
Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company
projects that the average natural gas price of the next 10 years could be as high as $0.85 per therm, discuss
how that might change your conclusion in (a).
Variable mfg. costs
New oven costs
Proceed from
scrapping old oven
Total
Retain Oven
?
Replace Oven
?
Net Income
Increase
(Decrease)
?
Value
Value
?
Value
Value
?
?
?
?
Response:
Situation 3
(a) Prepare an incremental analysis showing whether Current Designs should make or buy the "Revolution Seating
System."
Net Income
Make
?
Buy
Value
(Decrease)
Value
Direct labor
?
Value
Value
Variable mfg. costs
?
Value
Value
Fixed mfg. costs
Value
?
?
Purchase price
Value
?
?
?
?
?
Direct materials
Total annual cost
Response:
(b)
Would your answer in (a) change if the productive capacity released by not making the seats could be used to
produce income of $20,000?
Total annual cost
Make
Value
Buy
Value
Net Income
Increase
(Decrease)
Value
Opportunity cost
Value
Value
Value
?
?
?
Total cost
Response:
After you have completed CD7, consider the following additional questions.
1.
Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and
the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or
reject the special order.
2.
Assume in situation 2, the purchase price of the new oven changed to $100,000. Would this change
the decision to retain or replace the oven?
3.
Assume in situation 3, that the estimated number of seats to be produced changed to 3,500 and the cost to purchase
one seat from an outside supplier changed to $55. Should Current Designs make or buy the seats?
