Question

Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled in December of 20XY. They want to be prepared for this. Based on the budgeted income statement calculated above for 20XY, create a new budgeted income for 20XZ assuming that the production and sales is double the level of 20XY. 6. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one year’s time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?

Answer 1

The incremental analysis shows that Option 1 for the Lees' production space will cost $600 more per year than Option 2. The Yoga Center example demonstrates the decision-making process when operating costs and revenues are compared to determine the viability of continuing business.

Step-by-step explanation:

The incremental analysis involves comparing the additional costs of Option 1 over Option 2 for the Lees' production space requirements.

For Option 1, the additional annual cost for rent and utilities would be rent of $1200 per month plus utilities of $350 per month.

For Option 2, the costs are a rent of $1350 per month and utilities of $150 per month. Over a year, Option 1 equates to an annual cost of $18,600 (($1200 + $350) x 12 months), while Option 2 equates to $18,000 (($1350 + $150) x 12 months). Therefore, the incremental cost of choosing Option 1 over Option 2 is $600 per year.

Looking at the Yoga Center's situation as an example, if the center decides to operate, the expenses including variable costs and fixed costs must be covered by the realized revenue to avoid losses.

When the Yoga Center earns revenues of $20,000 with variable costs of $15,000, it covers more than the variable costs and contributes to fixed costs, hence, should continue in business.