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. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Per Unit $12.50 15.00 10.00 17.50 14.00 13.00 $82.00 Costs at 80,000 Units $1,000,000 1,200,000 800,000 1,400,000 1,120,000 1,040,000 $6,560,000 Totals 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.

Answer 1

	Normal volume	Additional volume	Combined Total
Sales	$8,000,000 (80,000*$100)	$1,500,000 (20,000*$75)	$9,500,000
Costs and expenses:
Direct materials	1,000,000	250,000 (20,000*$12.50)	1,250,000
Direct labor	1,200,000	300,000 (20,000*$15)	1,500,000
Variable manufacturing overhead	800,000	200,000 (20,000*$10)	1,000,000
Fixed manufacturing overhead	1,400,000	0	1,400,000
Variable selling and administrative expenses	1,120,000	380,000 (20,000*$19)	1,500,000
Fixed selling and administrative expenses	1,040,000	0	1,040,000
Total costs and expenses	$6,560,000	$1,130,000	$7,690,000
Net income (Loss)	$1,440,000	$370,000	$1,810,000

Accept the new business