Question

Exercise 23-2 Accept new business or not LO A1 Farrow Co. expects to sell 300,000 units of its product in the next period with the following results. $4,500,000 Sales (300,000 units) Costs and expenses Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses Net income 600,000 1,200,000 300,000 450,000 771,000 3,321,000 $1,179,000 ces The company has an opportunity to sell 30,000 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 16% 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 $12 per unit.

Answer 1

Analysis

	Normal volume	Additional volume	Combined total
Sales	4500000	360000	4860000
Cost and expenses
Direct material	600000	60000	660000
Direct labor	1200000	120000	1320000
Overhead	300000	48000	348000
Selling expense	450000	0	450000
Administrative expense	771000	129000	900000
Total expense	3321000	357000	3678000
Income (loss)	1179000	3000	1182000

Yes, Accept the special offer