Question

Goshford Company produces a single product and has capacity to produce 145,000 units per month. sales of 116,000 units follow. The regular selling price of the product is $132 per unit. Management is approached by a new custome who wants to purchase 29,000 units of the product for $80.10 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 $7.20 per unit shipping expense in addition to the regular variable selling and administrative produce its current expenses Costs at Per Unit $12.50 15.00 14.00 17.50 15.00 15.00 116,000 Units $ 1,450,000 1,740,000 1,624,e00 2,030,e00 1,740,000 1,740,000 $10,324,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Totals $89.00 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $80.10 per unit.

Answer 1

	Normal volume	Additional volume*	Combined Total
Sales	$15,312,000	$2,322,900	$17,634,900
Cost and expenses:
Direct materials	$1,450,000	$362,500	$1,812,500
Direct labor	$1,740,000	$435,000	$2,175,000
Variable overhead	$1,624,000	$406,000	$2,030,000
Fixed overhead	$2,030,000	0	$2,030,000
Variable selling and admin. Exp.	$1,740,000	$643,800	$2,383,800
Fixed selling and admin. Exp.	$1,740,000	0	$1,740,000
Total costs and expenses	$10,324,000	$1,847,300	$12,171,300
Net income (loss)	$4,988,000	$475,600	$5,463,600

*Additional volume = Per unit cost * 29,000 units

and for sales = $80.10 * 29,000 units = $2,322,900

for variable selling and admin. exp. = ( $15 + $7.20 ) * 29,000 units = $643,800 (as $7.20 is incurred in addition to current cost).

The management should accept the new business, as it gives extra net income to the company.