Acc102 Principles of Managerial Accounting: Final Project - Farrell Corporation

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Acc102 Principles of Managerial Accounting
Final Project (Version 1)

2. Incremental analysis (20 points)
Information regarding current operations of the Farrell Corporation is given below:
Sales $950,000
Variable costs $450,000
Fixed costs $310,000

A proposed addition to Farrell’s factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company’s accountants have determined that the proposed addition will add $320,000 to fixed costs each year.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce operating income.
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