Question

Goshford Company produces a single product and has capacity to produce 100,000 units per month. Costs to produce its current sales of 80,000 units follow. The regular selling price of the product is $100 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for $75.00 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 $5.00 per unit shipping expense in addition to the regular variable selling and administrative expenses. Per Unit Costs at 80,000 Units Direct materials $ 12.50 $ 1,000,000 Direct labor 15.00 1,200,000 Variable manufacturing overhead 10.00 800,000 Fixed manufacturing overhead 17.50 1,400,000 Variable selling and administrative expenses 14.00 1,120,000 Fixed selling and administrative expenses 13.00 1,040,000 Totals $ 82.00 $ 6,560,000 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $75.00 per unit. Determine whether management should accept or reject the new business. Accept Reject

Answer 1

	Normal sales (80,000 units)	additional sales (20,000 units)	total
sales (80,000*$100) (20,000*$75)	8,000,000	1,500,000	9,500,000
cost and expenses
direct materials (80,000*12.50) (20,000*12.50)	1,000,000	250,000	1,250,000
direct labor (80,000*15) (20,000*15)	1,200,000	300,000	1,500,000
fixed manufacturing overhead	1,400,000		1,400,000
variable manufacturing overhead (80,000*10)(20,000*10)	800,000	200,000	1,000,000
variable selling and administrative expense (14*80,000) [(14*20,000)+(5.00*20,000 for shipping)]	1,120,000	380,000	1,500,000
fixed selling and administrative expense	1,040,000		1,040,000
total costs	6,560,000	1,130,000	7,690,000
net income	1,440,000	370,000	1,810,000

The management can accept the new business, since it results in positive net income.