Farrow Co. expects to sell 400,000 units of its product in the next period with the following results. Sales (400,000 units) $ 6,000,000
Costs and expenses
Direct materials 800,000
Direct labor 1,600,000
Overhead 400,000
Selling expenses 600,000
Administrative expenses 1,028,000
Total costs and expenses 4,428,000
Net income $ 1,572,000
The company has an opportunity to sell 40,000 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 $172,000.
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

the combined total net income = $ 1,576,000

Incremental Income = $4,000

Explanation:

Calculation of the  combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.

Sales (400,000 units)                                                                     $ 6,000,000

Additional Sales (40,000 units × $12)                                                $480,000

Combined Sales                                                                               $6,480,000

Costs and expenses  :

Direct materials (800,000  + (800,000 / 400,000 × 40,000))      ( $880,000)

Direct labor (1,600,000  + (1,600,000 / 400,000 × 40,000))      ( $1,760,000)

Overhead 400,000  × 1.16                                                                 ($464,000)

Selling expenses                                                                              ($600,000 )

Administrative expenses ($1,028,000  + $172,000)                     ($1,200,000)

Net income                                                                                      $ 1,576,000

Incremental Income / (loss)

Net Income After Accepting Offer      $ 1,576,000

Less Income Before Accepting Offer $ 1,572,000

Incremental Income / (loss)                         $4,000

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