ProLight plans to sell 1,600 white lights that enhance indoor plant growth next year with total budgeted sales of $48,000 and estimated profit of $8,000.Variable costs are projected to be $17.50 per unit.Customer A offers to pay $10,000 to buy 400 lights from ProLight.Total fixed costs are $12,000 per year.This offer does not affect ProLight's other planned operations.What is the incremental cost associated with the offer from Customer A?

Question

Quizplus · Accepted Answer

The incremental cost is the additional cost incurred by accepting the offer from Customer A.

Currently, ProLight plans to sell 1,600 lights with total budgeted sales of $48,000 and estimated profit of $8,000.

Variable costs are $17.50 per unit, so the total variable cost for 1,600 lights is:

$17.50/unit x 1,600 units = $28,000

Total contribution margin (i.e. profit) is:

Total budgeted sales - Total variable costs = $48,000 - $28,000 = $20,000

If ProLight accepts Customer A's offer, they will sell 400 more lights, but at a lower price of $10,000. The variable costs for the additional 400 lights will be:

$17.50/unit x 400 units = $7,000

The incremental cost is the additional fixed costs that ProLight will incur by accepting the offer. However, since the offer does not affect ProLight's other planned operations, there are no additional fixed costs.

Therefore, the incremental cost associated with the offer from Customer A is $7,000 (option D).

ProLight Plans to Sell 1,600 White Lights That Enhance Indoor