Incremental cost please help

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jmh
jmh Registered Posts: 42
in Management Accounting: Decisions and Control
I wonder if someone can explain this to me. I am studding from Osborne book chapter 6 question 6.3 in tutorial.

They are asking what is the incremental cost for variable production cost.

Selling price is 15
variable production cost is 9
Fixed overheads based on production of 7000 units per week are 4
total production cost is 13
profit is 2

UK sales 7000 units per week no overseas sales. Capacity is 8000 units per week
overseas customer offered to buy 1500 units per week

The answer is 9000 and I dont know how they got to it.

Would be grateful if someone could explain to me. I am coming to 4500

Thank you

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  • fournaanjez
    fournaanjez Registered Posts: 32
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    As capacity is 8,000, there's only scope to produce another 1,000 units.

    Incremental cost would just be the variable element as the fixed overheads are the same regardless of output, so the incremental cost would be:

    1,000 units x £9 (variable cost per unit) = £9,000
  • jmh
    jmh Registered Posts: 42
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    Thank you for the explanation.

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