Farrow Co. expects to sell 150,000 units of its product in the next period with

Question

Farrow Co. expects to sell 150,000 units of its product in the next period with the following results. The company has an opportunity to sell 15,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $64,500. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.

Explanation / Answer

Existing   Additional Combined Sales 2,250,000 180,000 2,430,000 Cost and expenses: Direct Materials 300,000 30,000 330,000 Direct Labour 600,000 60,000 660,000 Overhead 150,000 22,500 172,500 Selling expenses 225,000 0 225,000 Administrative expenses 385,500 64,500 450,000 Total cost and expenses 1,660,500 177,000 1,837,500 Net Income 589,500 3,000 592,500 Existing Per Unit cost Total cost Total Unit Cost per unit DirectMaterial Cost    300,000.00    150,000.00                 2.00 Direct Labour cost    600,000.00    150,000.00                 4.00 Overhead Cost =    150,000.00 15% of above =      22,500.00

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