Exercise 7-9

Anna just opened her own basket-weaving studio. She sells finished baskets as well as the D-I-Y Kits of materials needed by customers to weave baskets of their own. Space is very limited so Anna can sell ONLY one of these two kits. Should she sell ONLY the Basic Kit or ONLY the Deluxe Kit?

Basic Kit includes undyed, uncut reeds (with dye included) for weaving one basket. Annas cost is $16. Anna retails (sells to customers) the Basic Kit for $30.

A Deluxe Kit would include already dyed and cut reeds so the customer need only weave the basket. Anna can produce Deluxe Kits by using the materials included in the Basic Kit. She can make TWO Deluxe Kits in one hour from one Basic Kit. (She values her time at $18 per hour.) The Deluxe Kit will retail for $36.

Instructions:

(a) Prepare an incremental analysis to determine whether Anna should sell

ONLY the Basic Kit or ONLY the Deluxe Kit.

(b) Which kit should she sell?. Why or why not?

a)	Sell ONLY Basic Kit	Sell ONLY Deluxe Kit	Net Income Increase or (Decrease)
Sales price per unit
Costs per unit:
Direct Materials
Direct Labor
Total
Net Income per unit

b)