Question

Farrow Co. expects to sell 300,000 units of its product in the next period with the following results Sales (300,000 units) Costs and expenses $4,500,000 Direct materials Direct labor Overhead Selling expenses Administrative expenses 600,000 1,200,000 300,000 450,000 771,000 3,321,000 $1,179,000 Total costs and expenses Net income The company has an opportunity to sell 30,000 additional units at $13 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $129,000 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit. Additional Volume Combined Total Normal Volume Costs and expenses Total costs and expenses Incremental income (loss) from new business

Answer 1

Answer

• All working forms part of the answer

	Normal Volume	Additional Volume	Combined Total
Sales	$          4,500,000	$             390,000	$        4,890,000
Costs and Expenses:
Direct Materials	$             600,000	$               60,000 [=($600000/300000units) x 30000 units]	$            660,000
Direct Labor	$          1,200,000	$             120,000 [=($1200000/300000units) x 30000 units]	$        1,320,000
Overhead	$             300,000	$               45,000 [=(300000 x 15%)]	$            345,000
Selling Expenses	$             450,000	$               45,000 [=($450000/300000units) x 30000 units]	$            495,000
Administrative expenses	$             771,000	$             129,000	$            900,000
Total Cost and expenses	$          3,321,000	$             399,000	$        3,720,000
Incremental Income (Loss) from new business	$          1,179,000	$               (9,000)	$        1,170,000

• Answer: The company should REJECT the offer

This is because the sale of additional volume is bring DOWN the Income by $ 9,000 [From $ 1,179,000 to $ 1,170,000]