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6 September, 10:02

Farrow Co. expects to sell 150,000 units of its product in the next period with the following results. Sales (150,000 units) $ 2,250,000 Costs and expenses Direct materials 300,000 Direct labor 600,000 Overhead 150,000 Selling expenses 225,000 Administrative expenses 385,500 Total costs and expenses 1,660,500 Net income $ 589,500 The company has an opportunity to sell 15,000 additional units at $12 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 $64,500. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit. Should the company accept or reject the offer?

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  1. 6 September, 10:13
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    Accept

    Explanation:

    The computation of the combined total net income is shown below:

    Normal Volume Additional Volume Total

    Sales $2,250,000 $180,000 $2,430,000

    (15,000 * $12)

    Costs and expenses:

    Direct materials $300,000 $30,000 $330,000

    Direct labor $600,000 $60,000 $660,000

    Overhead $150,000 $22,500 $172,500

    ($150,000 * 15%)

    Selling expenses $225,000 $225,000

    Administrative expenses $385,500 $64,500 $450,000

    Total costs and expenses $1,660,500 $177,000 $1,837,500

    Incremental income (loss) from new business $589,500 $3,000 $592,500

    Therefore, the company should accept the offer
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