Incremental Analysis
Information Regarding Current Operations of the Farrell Corporation

question 51

Essay

Incremental analysis
Information regarding current operations of the Farrell Corporation is given below:
$$\begin{array} { | l | l | } \hline \text { Sales } & \$ 950,000 \\\hline \text { Variable Costs } & \$ 450,000 \\\hline \text { Fixed Costs } & \$ 310,000 \\\hline\end{array}$$ 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.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce operating income.

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Definitions:

Total Assets

The sum of all current and non-current assets owned by a company, representing the total resources that can be used to generate future revenue.

Mutual Funds

A type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is managed by an investment company with contributions from individual investors.

Closed-End Funds

Investment funds with a fixed number of shares that are traded on stock exchanges, unlike mutual funds.

Unit Investment Trusts

A type of investment fund offering a fixed portfolio of securities for a specific period, known for its relatively low management expenses.