Gulf States Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2010, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below:
Direct materials .................................................................. $6.00
Direct labor 1 ..................................................................... .20
Variable manufacturing overhead .................................... .80
Fixed manufacturing overhead ......................................... .60
Total manufacturing costs ............................................... $8.60
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 $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.00 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.