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 D The company has an opportunity to sell 30,000 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 $129,000. 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?irect 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

Answer 1

Answer:

Explanation:

workings

Unit selling price = 4,500,000/300,000 = 15

Unit Direct material = 600,000/300,000 = 2

Direct labor rate = 1,200,000/300,000 = 4

selling expenses = 450,000/300,000 = 1.5

                        Normal Sales    Extra Sales                  Total

Turnover           4,500,000       390,000 (30,000*13)    4,890,000

Direct  material    600,000           60,000(30,000*2)        660,000

Direct labor        1,200,000          120,000(30,000*4)       1,320,000

Overhead              300,000          45,000 (300,000*15%)  345,000

Selling Expenses   450,000           45,000 (1.5*30000)      495,000

Admin Expenses     771,000            129,000                         900,000

Total cost               3,321,000         399,000                          3,720,000

Net income            1,179,000            (9000)                             1,170,000

B) The offer for additional sales at a reduced price of $13 should be declined as it ends up in a loss of $9,000 due to the related increase in the operating costs