Farrow Co. expects to sell 200,000 units of its product in the next period with
ID: 2476514 • Letter: F
Question
Farrow Co. expects to sell 200,000 units of its product in the next period with the following results.
Sales (200,000 units) $ 3,000,000 Costs and expenses
Direct materials 400,000
Direct labor 800,000
Overhead 200,000
Selling expenses 300,000
Administrative expenses 514,000
Total costs and expenses 2,214,000
Net income $ 786,000
The company has an opportunity to sell 20,000 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 16% and (2) administrative expenses would increase by $86,000. 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
Ans;
Normal Volume Additional
Volume Combined Total
Sales 3,000,000 260,000 3,260,000
Costs and expenses:
Direct materials 400,000 40,000 440,000
Direct labor 800,000 80,000 880,000
Overhead 200,000 32,000 232,000
Selling expenses 300,000 0 300,000
Administrative expenses 514,000 86,000 600,000
Total costs and expenses 2,214,000 238,000 2,452,000
Incremental income (loss)
from new business
786,000 22,000 808,000
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