Assignment:
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.
Q1. 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.
Q2. Calculate by how much the proposed addition will either increase or reduce operating income.
Provide complete and step by step solution for the question and show calculations and use formulas.