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?

 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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