Anna Garden recently opened her own basket weaving studio. She sells finished baskets in addition to selling the raw materials needed by customers to weave baskets of their own. Unfortunately, owing to space limitations, Anna is unable to carry all varieties of kits originally assembled and must choose between two basic packages. The Basic Kit includes undyed, uncut reeds (with dye included) for weaving one basket. This basic package costs Anna
- The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit, the customer needs only to soak the reeds and weave the basket. Anna produces the Stage 2 kit by using the materials included in the Basic Kit. Because she is more efficient at cutting and dyeing reeds than her average customer, Anna is able to produce two Stage 2 kits in one hour from one Basic Kit. (She values her time at
- Prepare an incremental analysis for Anna’s basket weaving studio.
The Correct Answer and Explanation is:
Incremental Analysis for Anna’s Basket Weaving Studio
Basic Kit vs. Stage 2 Kit
| Particulars | Basic Kit | Stage 2 Kit |
|---|---|---|
| Material Cost (per kit) | $30 | $30 (same kit) |
| Labor Time Required | 0 hours | 0.5 hours per kit |
| Labor Cost (per kit) | $0 | $18 (0.5 hr × $36/hr) |
| Total Cost (per kit) | $30 | $48 |
Anna must choose whether to sell the Basic Kit as is or convert it into Stage 2 Kits. The decision depends on how much profit she earns from each alternative.
Suppose she can sell:
- Basic Kit for $X
- Stage 2 Kit for $Y
Since she can make two Stage 2 Kits from one Basic Kit, the cost breakdown per Stage 2 Kit is:
- Material Cost: $30 / 2 = $15
- Labor Cost: $36 / 2 = $18
- Total Cost per Stage 2 Kit = $15 + $18 = $33
Incremental Comparison per Kit
| Item | Basic Kit | Stage 2 Kit |
|---|---|---|
| Selling Price | $X | $Y |
| Total Cost | $30 | $33 |
| Profit per Kit | $X – $30 | $Y – $33 |
To make an informed decision, Anna should compare the incremental profit between selling 1 Basic Kit or 2 Stage 2 Kits. For instance, if the Basic Kit sells for $40 and the Stage 2 Kit sells for $50:
- Profit from 1 Basic Kit = $40 – $30 = $10
- Profit from 2 Stage 2 Kits = 2 × ($50 – $33) = $34
Thus, the incremental profit from converting one Basic Kit into two Stage 2 Kits is:
$34 – $10 = $24
Conclusion
If Anna can sell Stage 2 Kits at a high enough price (e.g., $50), converting Basic Kits into Stage 2 Kits is more profitable, even after accounting for labor costs. However, if the price difference between the kits is small, the extra labor may not be worth the effort. Anna should perform this analysis using actual selling prices to guide her decision.
