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 4,428,000 $1,572,000 Total costs and expenses Net income 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 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 $13 per unit. Combined Total Additio Normal Volume Volume Costs and expenses Total costs and expenses Incremental income (loss) from new busi ness

Explanation / Answer

Normal Volume Additional Volume Combined Total Sales $6,000,000 $520,000 $6,520,000 Costs and expenses: Direct materials 800,000 80,000 $880,000 Direct labor 1,600,000 160,000 $1,760,000 Overhead 400,000 60,000 $460,000 Selling expenses 600,000 0 $600,000 Administrative expenses 1,028,000 172,000 $1,200,000 Total costs and expenses 4428000 472,000 $4,900,000 Incremental income (loss) from new business $1,572,000 $48,000 $1,620,000

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