Farrow Co. expects to sell 400,000 units of its product in the next period with
ID: 2490242 • Letter: F
Question
Farrow Co. expects to sell 400,000 units of its product in the next period with the following results. 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.Explanation / Answer
OVERHEAD
($400000 * 16%)
NORMAL VOLUME ADDITIONAL VOLUME COMBINED TOTAL SALES $6000000 $520000 $6520000 COST & EXPENSES DIRECT MATERIAL($800000 / 400000) $800000 $80000 $880000 DIRECT LABOUR ($1600000 / 400000) $1600000 $160000 $1760000OVERHEAD
($400000 * 16%)
$400000 $64000 $464000 SELLING EXPENSES $600000 N/A $600000 ADMIN EXPENSES $1028000 $172000 $1200000 TOTAL COST & EXPENSES $4428000 $476000 $4904000 INCEREMENTAL INCOME $1572000 $44000 $1616000Related Questions
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