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Incremental Costs. Electron Control, Inc.

1. Incremental Costs. Electron Control, Inc., sells voltage regulators to other manufacturers, who then
customize and distribute the products to quality assurance labs for their sensitive test equipment. The
yearly volume of output is 15,000 units. The selling price and cost per unit are shown below:

Selling price $200
Costs:
Direct material $35
Direct labor 50
Variable overhead 25
Variable selling expenses 25
Fixed selling expenses 15 150
Unit profit before tax $ 50


Management is evaluating the alternative of performing the necessary customizing to allow Electron
Control to sell its output directly to Q/A labs for $275 per unit. Although no added investment is
required in productive facilities, additional processing costs are estimated as:

Direct labor $25 per unit
Variable overhead $15 per unit
Variable selling expenses $10 per unit
Fixed selling expenses $100,000 per year

A. Calculate the incremental profit Electron Control would earn by customizing its instruments
and marketing directly to end users.

2. Profit Contribution Analysis. Fisherman’s Wharf Cotton, Inc., (FWC) sells souvenir T-shirts on San Francisco’s Pier 9 at a price of $10. Of this amount, $6 is profit contribution. FWC is considering an attempt to differentiate its products from several other competitors’ b using higher quality T-shirts. Doing so would increase FWC’s unit cost by $1 per shirt. Current monthly profits are $5,000 on 2,500 unit sales.
A. Assuming average variable costs are constant at all output levels, what is FWC’s total cost function before the proposed change?
B. What will the total cost functions be if higher quality T-shirts are used?
C. Assume shirt prices remain stable at $10. What percentage increase in sales would be necessary to maintain current profit levels?

3. Multiplant Operation. Tasty Snacks, Inc., a regional snack foods company (corn chips, potato chips,
etc.) in the northeast, is considering two alternative proposals for expansion into southeastern states.
Alternative 1: Construct a single plant in Chattanooga, Tennessee with a monthly production capacity
of 250,000 cases, a monthly fixed cost of $265,000, and a variable cost of $45 per case. Alternative 2:
Construct three plants, one each in Birmingham, Alabama, Tallahassee, Florida, and Charlotte, North
Carolina, with capacities of 100,000, 80,000 and 70,000, respectively, and monthly fixed costs of
$180,000, $150,000, and $135,000 each. Variable costs would be only $44 per case because of lower
distribution costs. To achieve these cost savings, sales from each smaller plant would be limited to
demand within its home state. The total estimated monthly sales volume of 175,000 cases in these
three southeastern states is distributed as follows: 70,000 cases in Florida, 60,000 cases in North
Carolina, and 45,000 cases in Alabama.

A. Assuming a wholesale price of $50 per case, calculate the breakeven output quantities for
each alternative.

B. At a wholesale price of $50 per case in all states, and assuming sales at the projected levels,
which alternative expansion scheme provides Tasty Snacks with the highest profit per
month?

C. If sales increase to production capacities, which alternative would prove to be more
profitable?

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