Question

Farrow Co. expects to sell 300,000 units of its product in the next period with the following results. Sales (300,000 units) $ 4,500,000 Costs and expenses Direct materials 600,000 Direct labor 1,200,000 Overhead 300,000 Selling expenses 450,000 Administrative expenses 771,000 Total costs and expenses 3,321,000 Net income $ 1,179,000 The company has an opportunity to sell 30,000 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 15% and (2) administrative expenses would increase by $129,000. 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

Answer and Explanation:

The preparation of the incremental analysis is shown below:

                                          Incremental analysis      

Particulars                       Normal         Additional                Total

Revenue                 $4,500,000 $360,000           $4,860,000  

                                 (30,000 units × $12)

Less: expenses

Material                          $600,000 $60,000                  $660,000  

                                                     ($600,000 ÷ 300,000 × 30,000 units)

Labor                        $1,200,000 $120,000           $1,320,000  

                                              ($1,200,000 ÷ 300,000 × 30,000 units)

Overhead               $300,000         $45,000                   $345,000  

                                                      ($300,000 × 15%)

Selling expenses    $450,000            $0                   $450,000  

Admin expenses    $771,000        $129,000                  $900,000  

Net income     $1,179,000         $6,000                  $1,185,000

Since the net income is increased by $6,000 so the company should accept the offer