Electron Control, Inc., sells voltage regulators to other manufacturers, who then customize and distribute the products to quality assurance labs for their sensitive test equipment. The yearly volume of output is 15,000 units. The selling price and cost per unit are shown below:
| Selling price |
|
$200 |
| Costs: |
|
|
| Direct material |
$35 |
|
| Direct labor |
50 |
|
| Variable overhead |
25 |
|
| Variable selling expenses |
25 |
|
| Fixed selling expenses |
15 |
150 |
| Unit profit before tax |
|
$ 50 |
Management is evaluating the alternative of performing the necessary customizing to allow Electron Control to sell its output directly to Q/A labs for $275 per unit. Although no added investment is required in productive facilities, additional processing costs are estimated as:
| Direct labor |
$25 per unit |
| Variable overhead |
$15 per unit |
| Variable selling expenses |
$10 per unit |
| Fixed selling expenses |
$100,000 per year |
| Calculate the incremental profit Electron Control would earn by customizing its instruments and marketing directly to end users. |
|