1. INCREMENTAL ANALYSIS

Information regarding current operations of the Farrell Corporation is given below:

Sales...................................................................................................................	$950,000
Variable Costs.....................................................................................................	$450,000
Fixed Costs.........................................................................................................	$310,000

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. Variable costs are expected to be at the same percentage as they currently are before the proposed addition.

1. 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.

The $310,000 in fixed cost is not conditional upon the proposal, as it is a sunk cost. A sunk cost cannot be recovered and will stay the same with or without the proposal. But the $320,000 is a proposal that has not been accepted and it has not been incurred yet, as it is an out-of-pocket cost.

1. Calculate by how much the proposed addition will either increase or reduce operating income. Show all work.