Farrow Co. expects to sell 150,000 units of its product in the next period with the following results.
Sales (150,000 units) . . . . . . . . . . . . . . $ 2,250,000
Costs and expenses Direct materials . . . . . . . . . . . . . . . . 300,000
Direct labor . . . . . . . . . . . . . . . . . . . 600,000
Overhead . . . . . . . . . . . . . . . . . . . . . 150,000
Selling expenses . . . . . . . . . . . . . . . . 225,000
Administrative expenses . . . . . . . . . 385,500
Total costs and expenses . . . . . . . . . . 1,660,500
Net income . . . . . . . . . . . . . . . . . . . . . $ 589,500
The company has an opportunity to sell 15,000 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 15% (2) Administrative expenses would increase by $ 64,500.
Prepare an analysis to determine whether the company should accept or reject the offer to sell additional units at the reduced price of $ 12 per unit.