Incremental Analysis Information Regarding Current Operations of the Farrell Corporation Is Given

Essay

Incremental analysis
Information regarding current operations of the Farrell Corporation is given below: 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.
(a)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.
(b)Calculate by how much the proposed addition will either increase or reduce operating income.