Fleet Co. produces an oil-based chemical product which it sells to paint manufacturers. In 2012, the company incurred $688,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $22.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below:
Direct materials.........................................$12.00
Direct labor...................................................2.40
Variable manufacturing overhead................1.60
Fixed manufacturing overhead....................1.20
Total manufacturing costs........................$17.20
The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $3.40, Direct labor $1.20, Variable manufacturing overhead $1.00 No increase in fixed manufacturing overhead is expected. The company can sell the paint at $30.00 per gallon.
Instructions
Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.