Question

Exercise 23-3 Accept new business or not LO A1 Goshford Company produces a single product and has capacity to produce 165,000 units per month. Costs to produce its current sales of 132,000 units follow. The regular selling price of the product is $110 per unit. Management is approached by a new customer who wants to purchase 33,000 units of the product for $78.30 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead and no additional fixed selling and administrative expenses. The customer is not in the company's regular selling territory, so there will be a $6.80 per unit shipping expense in addition to the regular variable selling and administrative expenses. points eBook Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Totals Per Unit $12.50 15.00 10.00 17.50 16.00 16.00 $87.00 Costs at 132,000 Units $ 1.650.000 1,980,000 1.320.000 2,310.000 2,112,000 2,112,000 $11.484.000

Answer 1

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Gosh Ford

Please note that any type of fixed cost is not relevant foe decision making of additional volume be it is related to manufacturing or selling or administrative. Reason is company will incur fixed cost even if there is no production. So they are called sunk costs.

Workings for additional volume:
Particulars	Per unit	Amount $	Remarks
Units ordered	33,000.00
Sell price	78.30	2,583,900.00	This is 33,000 units * $ 78.30
Direct Materials	12.50	412,500.00	This is 33,000 units * $ 12.50
Direct Labor	15.00	495,000.00	This is 33,000 units * $ 15
Variable Manufacturing overhead	10.00	330,000.00	This is 33,000 units * $ 10
Variable selling & administrative	16.00	528,000.00	This is 33,000 units * $ 16
Shipping Expense	6.80	224,400.00	This is 33,000 units * $ 6.80

Income Statement	Normal Volume	Additional Volume	Combined Total
Sales	14,520,000.00	2,583,900.00	17,103,900.00
Costs and expenses
Direct Materials	1,650,000.00	412,500.00	2,062,500.00
Direct Labor	1,980,000.00	495,000.00	2,475,000.00
Variable Manufacturing overhead	1,320,000.00	330,000.00	1,650,000.00
Fixed Manufacturing overhead	2,310,000.00	-	2,310,000.00
Variable selling & administrative	2,112,000.00	528,000.00	2,640,000.00
Fixed selling & administrative	2,112,000.00	-	2,112,000.00
Shipping Expense	-	224,400.00	224,400.00
Total Costs and expenses	11,484,000.00	1,989,900.00	13,473,900.00
Net Income (Loss)	3,036,000.00	594,000.00	3,630,000.00

Gosh Ford will have a incremental income of $ 594,000 so yes the order should be accepted.