Goshford Company produces a single product and has capacity to produce 180,000 units per month. Costs to produce its current sales of 144,000 units follow. The regular selling price of the product is $144 per unit. Management is approached by a new customer who wants to purchase 36,000 units of the product for $108 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 $8 per unit shipping expense in addition to the regular variable selling and administrative expenses. Per UnitCosts at 144,000 UnitsDirect materials $12.50 $1,800,000 Direct labor 19.50 2,808,000 Variable manufacturing overhead 14.00 2,016,000 Fixed manufacturing overhead 17.50 2,520,000 Variable selling and administrative expenses 17.00 2,448,000 Fixed selling and administrative expenses 14.00 2,016,000 Totals $94.50 $13,608,000
Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $108 per unit.
Normal Volume, Additional Volume, Combined Total
Normal Volume | Additional Volume | Combined Total | |
Sales | $20,736,000 (180,000*$144) | $3,888,000 (36,000*$108) | $24,624,000 |
Costs: | |||
Direct material | 1,800,000 | 450,000 (36,000*$12.5) | 2,250,000 |
Direct labor | 2,808,000 | 702,000 (36,000*$19.5) | 3,510,000 |
Variable manufacturing overhead | 2,016,000 | 504,000 (36,000*$14) | 2,520,000 |
Fixed manufacturing overhead | 2,520,000 | 0 | 2,520,000 |
Variable selling and administrative expenses | 2,448,000 | 900,000 [(36,000*25 (17+8)] | 3,348,000 |
Fixed selling and administrative expenses | 2,016,000 | 0 | 2,016,000 |
Total costs | 13,608,000 | 2,556,000 | 16,164,000 |
Net income | $7,128,000 | $1,332,000 | $8,460,000 |
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