Question

The company has an opportunity to sell 40,000 additional units at $13 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 15% 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 $13 per unit. Should the company accept or reject the offer?

Answer 1

Answer:

Yes, the company should accept the offer.

Explanation:

The company should accept the offer as it increases income by $44,000.

Additional volume computations:Additional sales revenue = 40,000 units @ $13 = $520,000

Materials cost per unit = $800,000 / 400,000 units = $2 per unit

Labor cost per unit = $1,600,000 / 400,000 units = $4 per unit

Direct materials = (40,000 × $2) = $80,000

Direct labor = (40,000 × $4) = $160,000

Incremental overhead = $400,000 × 16% = $64,000

Incremental administrative = $172,000 (given).