Christensen Mfg. produces leather strips for use in making bridles for horses. It normally sells...
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Christensen Mfg. produces leather strips for use in making bridles for horses. It normally sells 12,000 feet of one inch strips annually for $72,000. Variable costs for the leather strips are as follows:
Direct material
$18,000
Direct labor
40,000
Variable manufacturing overhead
12,000
Christensen is currently using 80% of its normal capacity. Christensen is considering using the other 20% to process the leather further and produce its own finished bridles. Each bridle would use 10 feet of leather strip. Christensen estimates that it could sell the finished bridles for $80. Christensen would incur additional material and labor costs of $10 per bridle and additional variable overhead costs of $4 per bridle. Additional equipment required would increase fixed overhead costs by $2,500 per year.
What would the annual incremental income or loss be if Christensen produces the bridles?
Select one:
a. $700 incremental income
b. $700 incremental loss
c. $1,800 incremental income
d. $1,800 incremental loss
e. None of the above
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