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 $146 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for $77.40 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. 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 16.00 1,280,000 Fixed selling and administrative expenses 15.00 1,200,000 Totals $ 86.00 $ 6,880,000 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $77.40 per unit. Loading... Determine whether management should accept or reject the new business. Accept Reject

Answer 1

Calculate combined Total Net income :

	80000 Units	20000 Units
Sales	80000*146 = 11680000	20000*77.4= 1548000
Cost
Direct material	1000000	20000*12.5 = 250000
Direct labor	1200000	20000*15 = 300000
Variable manufacturing overhead	800000	20000*10 = 200000
Fixed manufacturing overhead	1400000	0
Variable selling and administrative expense	1280000	23.2*20000 = 464000
Fixed selling and administrative expense	1200000	0
Total Cost	6880000	1214000
Net operating income	4800000	334000

Combined total net operating income = 4800000+334000 = $5134000

Yes company should accept the new bussiness