Question

Oak Company makes unfinished bookcases that it sells for $62. Production costs are $36 variable and $10 fixed. Because it has unused capacity, Oak Company is considering finishing the bookcases and selling them for $70. Variable finishing costs are expected to be $6 per unit with no increase in fixed costs. Oak Company should

A) sell finished bookcases because the sales price per unit increases $8
B) sell unfinished or finished bookcases because the variable cost per unit increases $6
C) sell finished bookcases because the net income per unit increases $2
D) neither, fixed cost per unit remain at $10
E) none of the above

Answer 1

After evaluating the costs and sales price, it is concluded that Oak Company should sell finished bookcases since the net income per unit increases by $2, making option C the correct answer.

Step-by-step explanation:

The question at hand requires an evaluation of whether Oak Company should sell unfinished bookcases or sell them finished by analyzing the impact on net income per unit. To determine this, we need to compare the increase in sales price to the increase in variable costs when finishing the bookcases. Currently, the unfinished bookcases are sold for $62, with variable costs of $36 and fixed costs of $10, making the profit per unit $16. If the bookcases are finished, the selling price will be $70, and the new variable costs will be $42 (original $36 plus finishing cost of $6) while fixed costs remain at $10; this results in a profit per unit of $18. Thus, the net income per unit increases by $2 when finishing the bookcases.

Therefore, the correct option is C) sell finished bookcases because the net income per unit increases $2.