Farrow Co. expects to sell 500,000 units of its product in the next period with
ID: 2634532 • Letter: F
Question
Farrow Co. expects to sell 500,000 units of its product in the next period with the following results.
The company has an opportunity to sell 50,000 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 $215,000.
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 (500,000 units) $ 7,500,000 Costs and expenses Direct materials 1,000,000 Direct labor 2,000,000 Overhead 500,000 Selling expenses 750,000 Administrative expenses 1,285,000 Total costs and expenses 5,535,000 Net income $ 1,965,000 Farrow Co. expects to sell 500,000 units of its product in the next period with the following results. Sales (500,000 units) $ 7,500,000 Costs and expenses Direct materials 1,000,000 Direct labor 2,000,000 Overhead 500,000 Selling expenses 750,000 Administrative expenses 1,285,000 Total costs and expenses 5,535,000 Net income $ 1,965,000 The company has an opportunity to sell 50,000 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 $215,000. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit. Normal Volume Additional Combined Total Volume Costs and expenses: Total costs and expenses Incremental income (loss) from new business Should the company accept or reject the offer? The company should reject the offer The company should accept the offerExplanation / Answer
Therefore incremental net income from new business is $2,265,000 from $1,965,000.
As there is incremental net income from acceptance of business, the company should accept the offer.
Normal Volume Additional Volume Combined Total Sales 7,500,000 650,000 8,150,000 Less: Costs and Expenses Direct Materials 1,000,000 0 1,000,000 Direct Labour 2,000,000 0 2,000,000 Overhead 500,000 75,000 575,000 Selling Expenses 750,000 0 750,000 Administrative Expenses 1,285,000 215,000 1,500,000 Total Costs and Expenses 5,535,000 350,000 5,885,000 Net Income 1,965,000 300,000 2,265,000Related Questions
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