Incremental analysis and project addition
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Sales................................................................$950,000
Variable costs.................................................. 450,000
Fixed costs....................................................... 310,000
A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year.
A-Explain why the existing $310,000 of fixed costs is a sunk cost, while the $320,000 of fixed costs associated with the proposed addition is an out of pocket cost.
B-Calculate by how much the proposed addition will either increase or reduce operating income.
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Solution Summary
The solution provides a incremental analysis and project addition.
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Solution A:
A sunk cost is a cost that has already been incurred, and for which the decision of the project addition would not be affected. In other words, a sunk cost has already been paid and cannot be recouped once paid. From the question, you will observe that the company pays ...
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