(Solved Homework): Information regarding current operations of the Farrell Corporation is given below:…

Information regarding current operations of the Farrell Corporation is given below:

Sales $950,000

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(Solved Homework): Information regarding current operations of the Farrell Corporation is given below:…
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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. Variable costs are expected to be at the same percentage as they currently are before the proposed addition.

Calculate by how much the proposed addition will either increase or reduce operating income. Show all work.

Expert Answer

Please find below the answer and please give thumbs up
Statementshowing Computations
Paticulars Current Proposed Difference
Sales             950,000.00       1,700,000.00          750,000.00
Less Variable Costs           (450,000.00)         (805,263.16)        (355,263.16)
Contribution             500,000.00           894,736.84          394,736.84
Fixed Costs           (310,000.00)         (630,000.00)        (320,000.00)
Income             190,000.00           264,736.84            74,736.84
Operating Income will increase by 74,736.84
VC Ratio = 450,000/950,000 47.37%
New VC = 1.7m*47.37%             805,263.16
New FC = 310000 + 320000             630,000.00

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