Anna Garden recently opened her own basketweaving studio. She sells finished baskets in addition to the raw materials needed by customers to weave baskets of their own. Anna has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Anna is unable to carry all varieties of kits originally assembled and must choose between two basic packages. The basic introductory kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic package costs Anna $18 and sells for $33. The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit the customer need only soak the reeds and weave the basket. Anna is able to produce the second kit by using the basic materials included in the first kit and adding one hour of her own time, which she values at $26 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Anna is able to make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The Stage 2 kit sells for $40. Prepare an incremental analysis for the Anna’s basketweaving studio. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45)) Net Income Sell Process Further Increase (Basic Kit) (Stage 2 Kit) (Decrease) Sales per unit Costs per unit Direct materials Direct labor Total Net income per unit Should Anna carry the basic introductory kit with undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut? Anna should carry the Question Attempts: 0 of 15 used Copyright 2000-2017 by elated companies.
The Correct Answer and Explanation is :
The table above presents an incremental analysis comparing the two kit options. Based on this analysis:
- The basic introductory kit yields a net income of $15 per unit.
- The Stage 2 kit yields a net income of $9 per unit.
Key observations:
- Sales per unit: The Stage 2 kit sells for $7 more than the basic kit ($40 vs. $33).
- Direct materials: Both kits require the same materials cost, $18 per unit.
- Direct labor: The Stage 2 kit incurs an additional $13 in labor costs due to the time Anna spends cutting and dyeing reeds.
- Total cost: The basic kit has a lower total cost ($18 vs. $31 for Stage 2).
- Net income per unit: The basic kit provides $6 more net income per unit than the Stage 2 kit.
Recommendation
Anna should carry the basic introductory kit because it generates a higher net income per unit. This decision maximizes profitability while potentially allowing Anna to focus her time on other revenue-generating activities.