Lab+Week+4+Answer - The alternative action is to sell the...

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a. Increase in revenues $44,000 Increase in costs: Direct materials $10,000 Direct labor 12,000 Variable factory overhead 13,500* Variable selling and administrative ($20 × 300) 6,000 (41,500 ) Increase in profits $ 2,500 *Budgeted annual overhead is 25 percent fixed ($100,000/$400,000). The variable overhead associated with the 300 Minnow Motors is $13,500 ($18,000 × 0.75). b. Fixed costs do not vary with volume, and in the absence of specific information, it is assumed that fixed costs do not vary between decision alternatives. Therefore, they were omitted from the analysis. c. 1. An opportunity cost is the net benefit of the alternative action.
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Unformatted text preview: The alternative action is to sell the Minnows at a price of $64,000. With incremental costs of $41,500, this action would provide net benefits of $22,500. This is the opportunity cost. Regular selling price $64,000 Incremental costs (41,500 ) Opportunity cost $22,500 2. With identical costs and a $20,000 lower selling price ($64,000 -$44,000), accepting Mr. Bass's offer will reduce profits by $20,000. Alternatively, this amount can be derived as follows: Profit on Mr. Bass's offer $ 2,500 Less opportunity cost (22,500 ) Increase (decrease) in profits $(20,000 )...
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