Question

Electric Scooter Co. makes motorized scooters for city commuters. The scooters can be charged using a regular household plug, and the batterie:s hold their charge for 24 hours. The manufacturing plant is currently operating at 70% capacity. The plant manager is considering manufacturing headlights for the scooters, which are currently being produced by an outside company and purchased by Electric Scooter for $11 each. Electric Scooter has the equipment and the workforce to produce the headlights. The engineers have suggested a variable cost of $3 in direct labour and $4 in direct materials. The plant overhead rate is 200% of direct labour dollars, and 40% of the overhead is fixed cost.

Calculate the incremental profit to producing the one headlight.

Answer 1

To calculate the incremental profit of producing one headlight, we subtract the cost of producing one headlight from the cost of purchasing one headlight. In this case, the incremental profit would be $1.60.

Step-by-step explanation:

To calculate the incremental profit of producing one headlight, we need to consider the variable cost and the fixed cost associated with manufacturing the headlights. The variable cost includes direct labor and direct materials, which are calculated to be $3 and $4 respectively. The plant overhead rate is 200% of direct labor, meaning the overhead cost is $6. Considering that 40% of the overhead cost is fixed, the fixed cost is $2.40. Therefore, the total cost to produce one headlight is $9.40.

On the other hand, if Electric Scooter continues to purchase headlights from the outside company, the cost per headlight is $11.

To calculate the incremental profit, we subtract the cost of producing one headlight from the cost of purchasing one headlight. In this case, the incremental profit would be $11 - $9.40 = $1.60.