Question

Exercise 23-2 Accept new business or not LO A1 Farrow Co. expects to sell 300,000 units...

Exercise 23-2 Accept new business or not LO A1

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 16% 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.

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

Should the company accept or reject the offer?

Homework Answers

Answer #1
Normal Volume Additional Volume Combined Total
Sales 4500000 $360,000 4860000
Costs and expenses:
Direct materials 600,000 60,000 660,000
Direct labor 1,200,000 120,000 1,320,000
Overhead 300,000 48,000 348,000
Selling expenses 450,000 0 450,000
Administrative expenses 771,000 129,000 900,000
Total costs and expenses 3,321,000 357,000 3,678,000
Incremental income (loss) from new business 1179000 3000 1182000
The company should accept the offer
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