Question

Determine whether management should accept or reject the new business.

Goshford Company produces a single product and has capacity to produce 135,000 units per month. Costs to produce its current sales of 108,000 units follow. The regular selling price of the product is $118 per unit. Management is approached by a new customer who wants to purchase 27,000 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 expenses. osts at Per Unit 108,000 Units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Totals $12.50 15.00 15.00 17.50 15.00 14.00 $89.00 $1,350,000 1,620,000 1,620,000 1,890,000 1,620,000 1,512,000 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. Normal Volume Additional Combined Total Volume Costs and expenses: Total costs and expenses Net income (loss)

Accept

Reject

Answer 1

Ans:

Calculation of the combined total net income if the company accepts the offer to sell additional units at the reduced price of $80.10 per unit :

Particulars	Normal Volume	Additional Volume	Combined Total
Sales (A)	$12,744,000	$2,162,700	$14,906,700
Costs and expenses:
Direct materials	1,350,000	337,500	1,687,500
Direct labor	1,620,000	405,000	2,025,000
Variable overhead	1,620,000	405,000	2,025,000
Fixed overhead	1,890,000	0	1,890,000
Variable selling and admin. exp.	1,620,000	599,400	2,219,400
Fixed selling and admin. exp.	1,512,000	0	1,512,000
			0
Total costs and expenses (B)	9,612,000	1,746,900	11,358,900
Net income (loss) (C) = (A - B)	$3,132,000	$415,800	$3,547,800

.

Explanation:

Calculations:

1. Normal volume sales : 108,000 units x $118 per unit = $12,744,000

2. Additional revenue from new order : 27,000 units x $80.10 per unit = $2,162,700

3. Additional direct materials : 27,000 units x $12.50 per unit = $337,500

4. Additional direct labor : 27,000 units x $15.00 per unit = $405,000

5. Additional variable manufacturing overhead : 27,000 units x $15.00 per unit = $405,000

6. Additional variable selling and administrative expense : 27,000 units x ($15.00 + $7.20) per unit = $599,400

Note :

Based on this analysis, Goshford should accept the new business.