Question

Farrow Co. expects to sell 200,000 units of its product in the next period with the following results:

Answer 1

Answer:

Combined net income =$810,000

Explanation:

In order to carry out an incremental analysis, only relevant cash flows should be considered.

The relevant cash flows from accepting the special order are the variable costs and the sales revenue plus the incremental cost of overhead and administrative cost . Please, note that the fixed costs are not relevant for this decision. Simply because they would be incurred either way.

The relevant cash flows include:

• The sales revenue
• The variable cost
• And the increase in overhead  and administrative cost

Selling price per unit = $13

Variable cost per unit of additional sales

= (Direct material + Direct labour cost)/200,000 = 6

Analysis of incremental net income

                                                                                            $

Additional sales revenue ( 13×× 20,000)  =              260,000

Incremental variable cost (6 × 20,000)    =                 120000

Incremental overhead        (15%× 200,000)  =           (30000)

Incremental admin cost                                             (86,000)

Net income from additional sales                               24,000

Combined net income = original Net income + Additional  net income

= 786,000  +   24000  = $810,000

Combined net income =$810,000