Farrow Co. expects to sell 300,000 units of its product in the next period with

Question

Farrow Co. expects to sell 300,000 units of its product in the next period with the following results.

The company has an opportunity to sell 30,000 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 15% and (2) administrative expenses would increase by $129,000.

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit.

Sales (300,000 units) $ 4,500,000 Costs and expenses Direct materials 600,000 Direct labor 1,200,000 Overhead 300,000 Selling expenses 450,000 Administrative expenses 771,000 Total costs and expenses 3,321,000 Net income $ 1,179,000

Explanation / Answer

Incremental Analysis Normal Additional Combined Volume Volume Total Sales revenue 4,500,000 390000 4,890,000 Less: Cost and expense Material 600000 60000 660000 Labour 1200000 120000 1320000 OH 300000 45000 345000 Selling expense 450000 45000 495000 Admin expense 771000 129000 900000 Total Cost and expense 3321000 399000 3720000 Incremental Income / (Loss) 1,179,000 -9000 1,170,000 No, the company shall not sell additional units

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