Question

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 16% 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. Should the company accept or reject the offer?

Answer 1

Farrow Co.

a. The combined total net income if the company accepts the offer to sell the additional units at the reduced price of $13 per unit is:

= $2,020,000.

b. The company should accept the offer, provided there is no proportionate additional selling expense.

Step-by-step explanation:

a) Data and Calculations:

Normal Additional Total

Expected sales 500,000 units 50,000 units 550,000 units

Sales revenue $7,500,000 $650,000 $8,150,000

Costs and expenses:

Direct materials 1,000,000 100,000 1,100,000

Direct labor 2,000,000 200,000 2,200,000

Overhead 500,000 80,000 580,000

Selling expenses 750,000 0 750,000

Administrative expenses 1,285,000 215,000 1,500,000

Total costs and expenses 5,535,000 595,000 6,130,000

Net income $ 1,965,000 $55,000 $2,020,000