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 $100 per unit. Management is approached by a new customer who wants to purchase 20,000 units of the product for $75.00 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 company’s regular selling territory, so there will be a $5.00 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 10.00 800,000
Fixed manufacturing overhead 17.50 1,400,000
Variable selling and administrative expenses 14.00 1,120,000
Fixed selling and administrative expenses 13.00 1,040,000
Totals $ 82.00 $ 6,560,000

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $75.00 per unit.

the combined total net income is $2,840,000

Explanation:

Consider Incremental Revenues and Cost in Addition to the existing results at 80,000 capacity as follows :

Sales((80,000×$100) + (20,000× $75.00))                                       9,500,000

Direct materials ($ 12.50 × 80,000)                                                  (1,000,000)

Direct labor ($15.00 × 80,000)                                                          (1,200,000)

Variable manufacturing overhead (10.00 × 80,000)                        (800,000)

Shipping Cost ($5.00 × 20,000 units)                                                (100,000)

Variable selling and administrative expenses (14.00 × 80,000)     (1,120,000)

Fixed manufacturing overhead                                                         (1,400,000)

Fixed selling and administrative expenses                                      (1,040,000)

Total net income                                                                                 2,840,000

disadvantages of leasing a vehicle: no vehicle equity and mileage limitations

disadvantages of purchasing a vehicle: large down payment and vehicle depreciation

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