Exercise 23-3 Accept new business or not LO A1

Goshford Company produces a single product and has capacity to produce 100,000 units per month. Costs to produce its current sales of 80,000 units follow. The regular selling price of the product is $110 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for $79.20 per unit. If the order is accepted, there will be no additional fixed manufacturing overhead and no additional fixed selling and administrative expenses. The customer is not in the companys regular selling territory, so there will be a $6.40 per unit shipping expense in addition to the regular variable selling and administrative expenses.

	Per Unit				Costs at 80,000 Units
Direct materials		$	12.50			$	1,000,000
Direct labor			15.00				1,200,000
Variable manufacturing overhead			11.00				880,000
Fixed manufacturing overhead			17.50				1,400,000
Variable selling and administrative expenses			17.00				1,360,000
Fixed selling and administrative expenses			15.00				1,200,000
Totals		$	88.00			$	7,040,000

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $79.20 per unit.

Determine whether management should accept or reject the new business.

• Accept

• Reject

Additional Volume Combined Total Normal Volume Costs and expenses: Total costs and expenses Net income (loss)