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23 December, 06:50

Farrow Co. expects to sell 200,000 units of its product in the next period with the following results. Sales (200,000 units) $ 3,000,000 Costs and expenses Direct materials 400,000 Direct labor 800,000 Overhead 200,000 Selling expenses 300,000 Administrative expenses 514,000 Total costs and expenses 2,214,000 Net income $ 786,000 The company has an opportunity to sell 20,000 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 $86,000. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit. Should the company accept or reject the offer?

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  1. 23 December, 10:19
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    Incremental income (loss) from new business

    786,000 2,000 788,000

    Yes. The company should accept the offer

    Explanation:

    Farrow Co.

    Normal Volume, Additional Volume,

    Combined Total

    Sales3,000,000 240,000 3,240,000

    Cost and Expenses:

    Direct Materials400,000 40,000 440,000

    Direct Labor800,000 80,000 880,000

    Overhead 200,000 32,000 232,000

    Selling Expense

    300,000 300,000

    Administrative expenses

    514,000 86,000 600,000

    Total Costs & Expenses

    2,214,000 238,000 2,452,000

    Incremental income (loss) from new business

    786,000 2,000 788,000

    Yes. The company should accept the offer

    Normal Volume + Additional Volume = Combined Total

    Sales = $ 3,000,000+$20,000 * 12

    = $ 3,000,000+$420,000

    = $3,420, 000

    $200,000 additional units * 12 per unit = $240,000

    Overhead 16%*$200,000=$32,000

    Sales-Total Costs & Expenses = Incremental income (loss) from new business
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