Question

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?

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