Derek77
Oct 30, 2013, 08:44 PM
Hello!
I am currently studying for an accounting exam tomorrow and would like verification on my answer to the following study question:
Rachel Rey recently opened her own basketweaving studio. She sells finished bas-kets in addition to the raw materials needed by customers to weave baskets of their own.Rachel has put together a variety of raw material kits, each including materials at variousstages of completion. Unfortunately, owing to space limitations, Rachel is unable to carryall varieties of kits originally assembled and must choose between two basic packages.The basic introductory kit includes undyed, uncut reeds (with dye included) for weav-ing one basket. This basic package costs Rachel $14 and sells for $30. The second kit,called Stage 2, includes cut reeds that have already been dyed. With this kit the customerneed only soak the reeds and weave the basket. Rachel is able to produce the second kitby using the basic materials included in the first kit and adding one hour of her own time,which she values at $18 per hour. Because she is more efficient at cutting and dying reedsthan her average customer, Rachel 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 $35.
Instructions
Determine whether Rachel’s basketweaving shop should carry the basic introductory kitwith undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut. Preparean incremental analysis to support your answer
My answer:
Rachel has higher potential profits by supplying the basic kit because its profit margin of $16 exceeds the profit margin of the stage two kit by $4.
Incremental analysis:
Stage 1 Stage 2
Revenue $30 $35
Cost $14 $23 ($14 plus $9laborhour)
Net Income $16 $12
I am currently studying for an accounting exam tomorrow and would like verification on my answer to the following study question:
Rachel Rey recently opened her own basketweaving studio. She sells finished bas-kets in addition to the raw materials needed by customers to weave baskets of their own.Rachel has put together a variety of raw material kits, each including materials at variousstages of completion. Unfortunately, owing to space limitations, Rachel is unable to carryall varieties of kits originally assembled and must choose between two basic packages.The basic introductory kit includes undyed, uncut reeds (with dye included) for weav-ing one basket. This basic package costs Rachel $14 and sells for $30. The second kit,called Stage 2, includes cut reeds that have already been dyed. With this kit the customerneed only soak the reeds and weave the basket. Rachel is able to produce the second kitby using the basic materials included in the first kit and adding one hour of her own time,which she values at $18 per hour. Because she is more efficient at cutting and dying reedsthan her average customer, Rachel 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 $35.
Instructions
Determine whether Rachel’s basketweaving shop should carry the basic introductory kitwith undyed and uncut reeds or the Stage 2 kit with reeds already dyed and cut. Preparean incremental analysis to support your answer
My answer:
Rachel has higher potential profits by supplying the basic kit because its profit margin of $16 exceeds the profit margin of the stage two kit by $4.
Incremental analysis:
Stage 1 Stage 2
Revenue $30 $35
Cost $14 $23 ($14 plus $9laborhour)
Net Income $16 $12