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 $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.

	Normal Volume	Additional Volume	Combined Total
Costs and expenses:
Total costs and expenses
Incremental income (loss) from new business

Answer 1

Incremental Analysis
			Normal	Additional	Combined
			Volume	Volume	Total
Sales revenue			4,500,000	390000	4,890,000
Less: Cost and expense
Material			600000	60000	660000
Labour			1200000	120000	1320000
OH			300000	45000	345000
Selling expense			450000	45000	495000
Admin expense			771000	129000	900000
Total Cost and expense			3321000	399000	3720000
Incremental Income / (Loss)			1,179,000	-9000	1,170,000
No, the company shall not sell additional units