Question

Lakeside Incorporated produces a product that currently sells for $62 per unit. Current production costs per unit include direct materials, $16.5; direct labor, $18.5; variable overhead, $11.5; and fixed overhead, $11.5. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase materia and labor costs by 20% per unit. Required: a. What would be the incremental profit or loss if Lakeside could sell the refined version of its product for $68 per unit? Note: Do not round your intermediate calculations. Round your final answer to 2 decimal places. Loss amounts should be indicated with a minus sign. b. Should it be processed further?

Answer 1

The decision should be based on a comprehensive analysis of both financial and non-financial factors to determine if the potential benefits, such as increased market share or customer loyalty, outweigh the incremental cost increase.

(a) To calculate the incremental profit or loss if Lakeside could sell the refined version of its product for $68 per unit, follow these steps:

Step 1: Calculate the current cost per unit:

Current Cost per Unit = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead

Current Cost per Unit = $16.5 + $18.5 + $11.5 + $11.5 = $58 per unit

Step 2: Calculate the new cost per unit with the production changes (increasing material and labor costs by 20%):

New Cost per Unit = Current Cost per Unit + (20% of Current Cost per Unit)

New Cost per Unit = $58 + (0.20 * $58) = $58 + $11.60 = $69.60 per unit

Step 3: Calculate the incremental profit or loss per unit with the refined version:

Incremental Profit (Loss) per Unit = Selling Price of Refined Version - New Cost per Unit

Incremental Profit (Loss) per Unit = $68 - $69.60 = -$1.60 per unit

So, the incremental profit per unit with the refined version is -$1.60 (a loss).

(b) Whether Lakeside should proceed with the refined version depends on various factors beyond just the incremental profit or loss per unit. Lakeside should consider market demand, customer preferences, and the potential for increased sales volume due to the improved quality and functionality of the product.Additionally, they should assess the competitive landscape and the impact of the refined version on their overall brand and market positioning.