Incremental Analysis question:

I know the answer is $4.20, but I can't figure out why.

Sandusky Inc. has the following costs when producing 100,000 units:

Variable costs $400,000
Fixed costs 600,000

An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $100,000 of net income. At what unit price would Sandusky accept the outside supplier’s offer if Sandusky wanted to increase net income by $80,000?

If you are relying on "cut and paste" it does not work here. You will need to type everything out.

Sra

Sorry, here is the question:

Sandusky Inc. has the following costs when producing 100,000 units:
Variable Costs $400,000
Fixed Costs 600,000

An outside supplier is interested in producing the item for Sandusky. If the item is producing outside, Sandusky could use the released production facilities to make another item that would generate $100,000 of net income. At what unit price would Sandusky accept the outside supplier's offer if Sandusky wanted to increase net income by $80,000?

I know the answer is $4.20, but can't figure out how to get that.

Sandusky Inc. has the following costs when producing 100,000 units:

Variable Costs $400,000
Fixed Costs 600,000

An outside supplier is interested in producing the item for Sandusky. If the item is producing outside, Sandusky could use the released production facilities to make another item that would generate $100,000 of net income. At what unit price would Sandusky accept the outside supplier's offer if Sandusky wanted to increase net income by $80,000?

To answer this question, we need to use incremental analysis to determine the unit price at which Sandusky Inc. would accept the outside supplier's offer.

Incremental analysis involves comparing the incremental costs and benefits of different options to make a decision. In this case, we are comparing the costs and benefits of Sandusky Inc. producing the item internally versus accepting the outside supplier's offer.

Let's break down the analysis step by step:

1. Calculate the incremental costs of producing the item internally:
- Variable costs: $400,000 (given)
- Fixed costs: $600,000 (given)
- Total costs: $400,000 + $600,000 = $1,000,000

2. Calculate the incremental benefits of accepting the outside supplier's offer:
- Net income from producing another item: $100,000 (given)

3. Calculate the net income increase desired by Sandusky Inc.:
- $80,000 (given)

4. Calculate the required incremental revenue to achieve the desired net income increase:
- Net income increase / Contribution margin ratio
- Contribution margin ratio is calculated as: (Total revenue - Total variable costs) / Total revenue

In this case, the contribution margin ratio cannot be calculated based on the given information. We need either the total revenue from producing 100,000 units or the unit selling price. Without knowing the contribution margin ratio, we cannot directly calculate the required incremental revenue.

Given the information provided in the question, it seems that there might be some missing values or additional information needed to accurately answer the question.