Farrow Co. expects to sell 400,000 units of its product in the next period with
ID: 2573590 • Letter: F
Question
Farrow Co. expects to sell 400,000 units of its product in the next period with the following results Sales (400,000 units) Costs and expenses $6,000,000 Direct materials Direct labor Overhead Selling expense Administrative expenses 800,000 1,600,000 400,000 600,000 1,028,000 Total costs and expenses 4,428,000 Net income $1,572,000 The company has an opportunity to sell 40,000 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 $172,000 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
Sales Cost Per Unit Normal Volume Additional Volume Combined Total Sales (Units) $ 15 $ 4,00,000 $ 40,000 $ 4,40,000 Sales Value $ 60,00,000 $ 4,80,000 $ 64,80,000 Less: Costs And Expenses (40,000 Units X 12) Direct Materials $ 2.00 $ 8,00,000 $ 80,000 $ 8,80,000 Direct Labours $ 4.00 $ 16,00,000 $ 1,60,000 $ 17,60,000 Overhead $ 1.00 $ 4,00,000 $ 60,000 $ 4,60,000 Selling Expenses $ 1.50 $ 6,00,000 $ 60,000 $ 6,60,000 Administration Expenses $ 10,28,000 $ 1,72,000 $ 12,00,000 Total Cost and Expenses $ 44,28,000 $ 5,32,000 $ 49,60,000 Net Increamental income (Loss) from the new business $ 15,72,000 $ -52,000 $ 15,20,000 There is reduction in the total income by $ 52,000 because of the accept of the offer price at $ 12 Per unit So because of there is reduce in profit this offer will be not accept Answer = The Company should reject the offer.
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