Page 579 - Sensors and Control Systems in Manufacturing

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11.2.4 Incremental Analysis
Incremental costs and revenues are those that change with increases or
decreases in the production level. Fixed costs as well as variable costs
may change under certain conditions. Incremental analysis is an
examination of the changes in the costs and revenues related to some
proposed course of action, some decision that will alter the produc-
tion level or change production activity. Two kinds of incremental
analyses are explained here.

11.2.5 The Large New Production Order
Sometimes it happens that a manufacturer has an opportunity to land
a new customer and a very large order for goods. Usually, such a
large order cannot be landed without adding new production employ-
ees and supervisors and increasing overhead costs. The new order
thus creates a decision-making problem in which basic information
differs somewhat from the current cost data. A study of the incre-
mental costs and revenues—those that arise from the new contract—
provides information on which the manufacturer can base the decisions
to accept or reject the new order.
Suppose that a manufacturer currently produces 10,000 product
units a year. Fixed costs are $20,000 and variable costs, $5 per unit—
$2 for materials, $1 for labor, $1 for variable production overhead,
and $1 for variable selling expenses. The unit selling price is $10.
A new customer wishes to buy 10,000 units a year at $9 per unit. A new
night shift would be required to double the plant’s production as
required by the new customer’s order.
Costs at the original level of production (10,000 units) are not nec-
essarily accurate for the new level (20,000 units). Assume that the
costs of producing the 10,000 additional units required by the new
order are estimated as follows:

Variable costs per unit
Materials $2.00
Labor (including night shift premium) 2.00
Variable production overhead 1.25
Variable selling costs 0
Total variable costs $5.25
Incremental fixed costs
Additional supervisors $10,000
Power, light, heat 5,000
Office expenses 3,000
Total incremental fixed costs $18,000