Exercise 10-2 Accept new business or not LO A1

Farrow Co. expects to sell 500,000 units of its product in the next period with the following results.

Sales (500,000 units)	$	7,500,000
Costs and expenses
Direct materials		1,000,000
Direct labor		2,000,000
Overhead		500,000
Selling expenses		750,000
Administrative expenses		1,285,000
Total costs and expenses		5,535,000
Net income	$	1,965,000

The company has an opportunity to sell 50,000 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 $215,000. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit.

	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?

a. The company should reject the offer

b. The company should accept the offer