Farrow Co. expects to sell 400,000 units of its product in the next period with

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 expenses 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 $13 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 $172,000 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit. Additional Volume Combined Total Normal Volume Costs and expenses Total costs and expenses Incremental income (loss) rom new businesS Should the company accept or reject the offer? The company should accept the offer e company should reject the offer Th

Explanation / Answer

Company should accept the offer, becuase net income of the company will increase if the order accepted

Normal volume Additional volume Combined total Sales $             6,000,000 40,000*$13 = $520,000 $             6,520,000 Costs and expenses Direct materials $                800,000 $800,000/400,000*40,000 = $80,000 $                880,000 Direct labour $             1,600,000 $1,600,000/400,000*40,000 = $160,000 $             1,760,000 Overhead $                400,000 $400,000*16% = $64,000 $                464,000 Selling expenses $                600,000 $                600,000 Administrative expenses $             1,028,000 $                                                              172,000 $             1,200,000 Total costs and expenses $             4,428,000 $                                                              476,000 $             4,904,000 Incremental income (loss) from new business $             1,572,000 $                                                                44,000 $             1,616,000

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