Question

Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2013, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below:

Direct materials$6.00

Direct labor1.20

Variable manufacturing overhead.80

Fixed manufacturing overhead .60

Total manufacturing costs$8.60

The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon.

Instructions

Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.

Answer 1

incremental per gallon increase in net income = $18.30

the total increase in net income = $732,000

Step-by-step explanation:

incremental per gallon increase in net income

Consider only the Incremental Costs and Revenues. Fixed manufacturing overheads are irrelevant for this decision.

Sales $15.50

Direct materials ($1.70)

Direct labor ($0.60)

Variable manufacturing overhead ($0.50)

Total $18.30

the total increase in net income

total increase = incremental per gallon × number of gallons

= $18.30 × 40,000

= $732,000