3)

If demand for 2022 is instead 2,500 units should the company pay to increase their capacity? Why? Please explain your calculations and reference to the chart in Figure 1. Assume units are sold at the normal price. Please mention the concept of incremental profits.

Hint: If you expand capacity, you will have to pay additional fixed costs of $25,000. Remember that fixed costs are fixed within the relevant range. If you expand capacity then you are outside this range. If you expand capacity then you can make revenue on 500 additional units at the normal price and would pay variable costs on 500 additional units. Please consider the incremental profit or loss of expanding capacity. The incremental profit is the increase in revenues minus the increase in costs of adding 500 more units. If the incremental profit of expanding capacity is positive then you should do so.

Very confused with this question. May you please be as detailed as possible in order for me to understand the concept? Please and thank you!

Case: The Dial Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow: Direct labor Advertising Factory supervision Property taxes, factory building Sales commissions Insurance, factory Depreciation, administrative office equipment Lease cost, factory equipment Indirect materials, factory. Depreciation, factory building Administrative office supplies (billing) Administrative office salaries Direct materials used (wood, bolts, etc.) Utilities, factory. $118,000 $50,000 $40,000 $3,500 $80,000 $2,500 $4,000 $12,000 $6,000 $10,000 $3,000 $60,000 $94.000 $20,000 The patio sets are normally sold for $400 per set. Dial can increase capacity by 500 units to 2,500 units (from previous capacity of 2,000 units) but must pay $25,000 to do so. Annual cost data for the production of 2,000 sets are classified as follows: Selling or Administrative Cox Cost Behavior Variable $118,000 Product Cost Indirect Cast Item Fixed Direct $118,000 Direct labor $50,000 $50,000 40,000 $40,000 3,500 3,500 80,000 80,000 2,500 2,500 4,000 4,000 Advertising Factory supervision Property taxes, factory building. Sales commissions. Insurance, factory Depreciation, administrative office equipment Lease cost, factory equipment Indirect materials, factory..... Depreciation, factory building.. Administrative office supplies.. Administrative office salaries Direct materials used 12,000 12,000 6,000 6,000 10,000 10,000 3,000 3,000 60,000 60,000 94,000 94,000 Utilities, factory 20,000 20,000 Total costs $32.1.000 $182.000 $197.000 $12.00 $94.000