Purchase Solution

incremental net income

Not what you're looking for?

Ask Custom Question

Aurora Industries manufactures a hand-held electric hair dryer. Sales have steadily increased during the recent past and, as a result of a just-completed expansion program, Aurora has annual capacity now of 250,000 units. Production and sales during the coming year are forecast at 150,000 units. Standard production costs have been estimated as:

Materials $3.00
Direct Labor 2.00
Variable Indirect Labor 0.50
Fixed overhead 1.00
Allocated cost per unit $6.50
In addition to production costs, Aurora incurs fixed selling expenses of $0.50 per unit and variable warranty repair expenses of $0.75 per unit. It currently receives $8.25 per unit from its customers-primarily retail department stores-and it expects this price to continue to hold during the coming year.
After making the above projections, Aurora received an inquiry from a discount department store for a large number of units. The inquiry contained two purchase offers:
Offer 1-The department store would purchase 100,000 units at $8 per unit. These units would bear the Aurora brand and the Aurora warranty would cover them.
Offer 2-The department store would purchase 150,000 units at $7 per unit. These units would be sold under the buyer's private label and Aurora would not provide warranty service.

Three questions(include calculations supporting answers):

(A) Evaluate the incremental net income from each offer.

(B) What factors other than incremental net income should Aurora take into consideration in deciding which offer to accept?

(C) Which offer, if either, should Aurora accept and why?

Purchase this Solution
Solution Summary

Evaluate the incremental net income from each offer.

Solution Preview

(A) Evaluate the incremental net income from each offer.

As per the figures given above, in case of offer 1, the total cost per unit will be:

Allocated cost: 6.50
Fixed selling expenses: .50
Warrantly repair expenses: .75

Total: 7.75 per unit

For 100, 000 units at $8/unit, incremental net income will be 100,000 * .25 (8-7.75) or 25,000 dollars.

In the case of offer 2, the total cost per unit will be the above mentioned cost minus the warranty expense of .75, ie, 7.75-.75 or $7.

Therefore, the company will be selling the product at break even pricing, based on above estimates at $7 per unit.

From these calculations, ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
Recent Feedback
  • "Thanks"
  • "Thanks"
  • "Very good! "
  • "thanks"
  • "Thank you!"
Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Incremental Analysis - Revenues, Costs and Net Income

    = Answer Revenue, cost and net income for incremental analysis is examined.

  • Net Income/Cash Flow - Best Manufacturing Company

    2,500 2,500 2,500 2,500 Incremental Income before tax 2,500 2,500 2,500 2,500 Less Taxes 850 850 850 850 Incremental Net Income 1,650 1,650 1,650 1,650 2 Compute the incremental cash flows of the investment for each year.

  • Incremental Unlevered Net Income

    This solution illustrates how to compute a project's incremental unlevered net income.

  • Incremental cash flow

    Incremental cash flow in year 1 = Net Income + Depreciation Net Income is calculated as Sales = 85,000 Operating Cost = 10,000 Depreciation = (178,000+12,000)/5 = 38,000 Income before tax = 85,000-10,000-38,000=37,000 Tax = 37,000 X 40% = 14,800

  • Finance problem

    We need to add back non-cash expense, that is the depreciation expense and net working capital to the incremental net income in order to get the incremental cash flows of the investment.

  • Incremental Analysis Net Income

    Product 12 Product 14 Product 16 Determine total net income using the results from the previous part of the question. $ See attached The solution provides an incremental analysis net income.

  • Incremental Earnings and Free Cash Flows

    Generally, incremental earnings is the net increase in net income from making an investment, while free cash flow is the effect on cash (increases and decreases) from making an investment.

  • Incremental Analysis

    39438 Incremental Analysis If an incremental analysis looks like this: Reject Accept Net Income Order Order Increase(Decrease) Revenues Costs Net Income

  • Incremental cash flows of the investment

    Compute the incremental net income of the investment for each year. b. Compute the incremental cash flows of the investment for each year. c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

  • Incremental Analysis for Decision Making

    is a Net income of $26000.

View More Related Solutions