Question

PLEASE DO PROBLEM

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

	Normal Volume	Additional Volume	Combined Total
Sales	4500000	390000	4890000
Costs and expenses:
Direct materials	600000	60000	660000
Direct labor	1200000	120000	1320000
Overhead	300000	45000	345000
Selling expenses	450000	0	450000
Administrative expenses	771000	129000	900000
Total costs and expenses	3321000	354000	3675000
Incremental income (loss) from new business	1179000	36000	1215000
Workings:
	Additional Volume
Sales	390000	=30000*13
Costs and expenses:
Direct materials	60000	=600000/300000*30000
Direct labor	120000	=1200000/300000*30000
Overhead	45000	=300000*15%