Exercise 23-2 Accept new business or not LO A1 Farrow Co. expects to sell 200,00
ID: 2555924 • Letter: E
Question
Exercise 23-2 Accept new business or not LO A1 Farrow Co. expects to sell 200,000 units of its product in the next period with the following results Sales (200,000 units) Costs and expenses 3,000,000 Direct materials Direct labor Overhead Selling expenses Administrative expenses 400,000 800,000 200,000 300,000 514,000 Total costs and expenses 2,214,000 Net income $ 786,000 The company has an opportunity to sell 20,000 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 16% and (2) administrative expenses would increase by $86,000 Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit Normal Volume:Volume Additional Combined Costs and expenses 0 0 0 0 0 0 0 Total costs and expenses 0 Incremental income (loss) from new business I s $ 0Explanation / Answer
Direct material cost per unit = 400,000 / 200,000 = 2
Direct labour cost per unit = 800,000 / 200,000 = 4
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The company should accept the offer (as there is increase in profit by 2,000)
Normal volume Additional volume Combined total Sales 3,000,000 240,000 (20,000*12) 3,240,000 Costs and expenses : Direct Materials 400,000 40,000 (20,000*2) 440,000 Direct labour 800,000 80,000 (20,000*4) 880,000 Overhead 200,000 32,000 (200,000*16%) 232,000 Selling expenses 300,000 300,000 Administrative expenses 514,000 86,000 600,000 Total costs and expenses 2,214,000 238,000 2,452,000 Incremental income(loss) from new business 786,000 2,000 788,000Related Questions
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