Question

Farrow Co. expects to sell 200,000 units of its product in the next period with the following results. Sales (200,000 units) $ 3,000,000 Costs and expenses Direct materials 400,000 Direct labor 800,000 Overhead 200,000 Selling expenses 300,000 Administrative expenses 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. Should the company accept or reject the offer?

Answer 1

Farrow company should accept the offer as it yields more income.

Step-by-step explanation:

Farrow Co.

Analysis

(200,000 units) Additional Units

(200,000 units) + 20000

Sales $ 3,000,000 3,420, 000***

Costs and expenses

Direct materials 400,000 400,000

Direct labor 800,000 800,000

Overhead 200,000 232,000*

Selling expenses 300,000 300,000

Administrative expenses 514,000 600,000**

Total costs and expenses 2,214,000 2332000

Net income $ 786,000 $ 1088,000

Calculation of the required figures

Overhead = 200,000 + 16% 0f 200,000= 200,000 + 32000= 232,000

Administrative Expenses= 514,000+ $86,000= 600,000

Sales = $ 3,000,000+20000 *12= $ 3,000,000+420000 = $3,420, 000

Farrow Company should accept the offer as it yields more income.

Answer 2

Incremental income ( loss) from new business

786,000 2,000 788,000

Yes. The company should accept the offer

Step-by-step explanation:

Farrow Co.

Normal Volume, Additional Volume,

Combined Total

Sales3,000,000 240,000 3,240,000

Cost and Expenses:

Direct Materials400,000 40,000 440,000

Direct Labor800,000 80,000 880,000

Overhead 200,000 32,000 232,000

Selling Expense

300,000 300,000

Administrative expenses

514,000 86,000 600,000

Total Costs & Expenses

2,214,000 238,000 2,452,000

Incremental income ( loss) from new business

786,000 2,000 788,000

Yes. The company should accept the offer

Normal Volume + Additional Volume= Combined Total

Sales = $ 3,000,000+$20,000 *12

= $ 3,000,000+$420,000

= $3,420, 000

$200,000 additional units ×12 per unit =$240,000

Overhead 16%×$200,000=$32,000

Sales-Total Costs & Expenses =Incremental income ( loss) from new business