Goshford Company produces a single product and has capacity to produce 160,000 u

Question

Goshford Company produces a single product and has capacity to produce 160,000 units per month. Costs to produce its current sales of 128,000 units follow. The regular selling price of the product is $140 per unit. Management is approached by a new customer who wants to purchase 32,000 units of the product for 105.00 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 per unit shipping expense in addition to the regular variable selling and administrative expenses Costs at 128,000 Units 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 11.00 17.50 16.00 15.00 $ 1,600,000 1,920,000 1,408,000 2,240,000 2,048,000 1,920,000 Totals $ 87.00 S 11,136,000 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $105.0 per unit. Normal Volume Additional Combined Total Volume ales S 17,920,000 S 3,360,000 21,280,000 Costs and expenses 1,600,000 1,920,000 1,408,000 2,240,000 2,048,000 1,920,000 2,000,000 2,400,000 1,760,000 2,240,000 2,048,000 1,920,000 400,000 480,000 352,000 Direct materials Direct labor Variable overhead Fixed overhead Variable selling and admin. exp Fixed selling and admin. exp Total costs and expenses Net income (loss) 11,136,000 1,232,000 12,368,000 S 6,784,000 2,128,000 $ 8,912,000

Explanation / Answer

Ghoshford company

Total variable cost per unit = 12.5+15+11+16 = 54.5

Additional selling expense = 5

Total variable cost = 59.5

Selling price = 105

Additional units = 32000

Profit from additional units = 32000×(105-59.5) = $1456000

+profit from normal volume = (140×128000)-11136000 = $6784000

= total net income if offer is accepted = 8240000

Gelb company

Increamental cost of making 41000 units

= (5.15-3.50)×41000 + 71000 fixed cost

= $138650

Allocated fixed cost of $78500 are unavoidable so this is irrelevant cost.

Company should buy the components from market as it is a cheaper option.

Varto company

If company sells 11000 units to wholesaler @11 each then profit will be = 11000×11 = 121000

Cost of manufacturing in the last year is sunk cost and therefore irrelevant.

If the units are further processed

Sales = 11000×31 = 341000

Cost of processing = 226500

= net profit = $114500

Cost of manufacturing last year has been avoided as it is sunk cost and therefore irrelevant.

So the company should choose to sell the units to wholesaler @ 11 each as there will be incremental income of $121000-114500 = $6500

Cobe company

If the units are sold as is

Profit = $420000

Cost of $25 per unit is same under both options therefore irrelevant.

If the units are processed further

Additional cost = $250000

Additional revenue =

Product B = 106×5600 = $593600

Product C = 11400×55 = $627000

Profit = 593600+627000-250000

= $970600

Incremental income if units are processed further

= 970600-420000 = $550600

So the units should be further processed and then sold as the profit is more in this case.

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