MANAGERCIAL ACCOUNTING ACCT 202: ACCOUNTING ACCT 250-50 SPRING 2016 Exam 4 Chapt

Question

MANAGERCIAL ACCOUNTING ACCT 202: ACCOUNTING ACCT 250-50 SPRING 2016 Exam 4 Chapters 22, 23, & 24 K Question 23 (of 28) 23 Farrow Co. expects to sell 300,000 units of its product in the next period with the following results. $4,500,000 Sales (300,000 units) Costs and expenses 600,000 Direct materials 1,200,000 Direct labor 300,000 Overhead Selling expenses 450,000 Administrative expenses 771,000 3,321,000 Total costs and expenses Net income 79,000 The company has an opportunity to sell 30,000 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 $129,000. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit. Additional Combined Normal Volume Total Volume Costs and expenses: Total costs and expenses Incremental income (loss) from new business Should the company accept o reject the offer? O The company should reject the offer O The company should accept the offer Chris Brose instructions help Save & Exit submit Time remaining: 12126

Explanation / Answer

Accept the offer as it results in incremental income of $ 6000

Normal Additional volume combined Total sales 4,500,000 360,000    [30000*12] 4,860,000 cost and expenses Direct material 600,000 60000     [600,000*30000/300000] 660000 Direct labor 1,200,000 120,000 [1200000*30000/300000] 1,320,000 Overhead 300,000 45000     [345000-300000] 345,000     [300000(1+.15)] selling expense 450000 450000 Administration expense 771000 129000 900,000 Total cost 3,321,000 354,000 3,675,000 Incremental income /(loss) 1,179,000 6000 1,185,000

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