Question

Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2019, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials $6.00 Direct labor 1.20 Variable manufacturing overhead .80 Fixed manufacturing overhead .60 Total manufacturing costs $8.60 The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon. Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint. (

Answer 1

Total incremental net income = $28,000

Incremental per gallon increase in net income = $0.70 per unit

Step-by-step explanation:

a. The preparation of incremental statement to find out the increase in net income

Total production $140,000

Less:

Incremental cost

Direct material $68,000

($1.70 × 40,000 gallons)

Direct labor $24,000

($0.60 × 40,000 gallons)

Variable manufacturing

overhead $20,000

($0.50 × 40,000 gallons)

Total incremental cost ($112,000)

Total incremental net income $28,000

b. Incremental per gallon increase in net income = Total incremental net income ÷ Total quantity

= $28,000 ÷ 40,000 gallons

= $0.70 per unit

Therefore the total incremental net income is $28,000 and incremental per gallon increase in net income is $0.70 per unit.