Question

Question 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 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 sellingterritory, so there will be a $5 per unit shipping expense in addition to the regular variable selling and administrative expenses Unit 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

1. Determine whether management should accept or reject the new business.

2. What nonfinancial factors should management consider when deciding whether to take this order?

Answer 1

Step 1: Definition of incremental income

 

The incremental income is the company’s income after choosing various courses of action.

 

Step 2: Calculation f incremental income or loss

	Normal Value	Additional Value	Combined Total
Sales	$8,000,000	$1,500,000	$9,500,000
Cost and Expenses:
Direct Material	$1,000,000	$250,000	$1,250,000
Direct Labour	$1,200,000	$300,000	$1,500,000
Variable Overhead	$800,000	$200,000	$1,000,000
Fixed Overhead	$1,400,000	$350,000	$1,750,000
Variable Selling and Administrative Expenses	$1,120,000	$280,000	$1,400,000
Fixed Selling and Administrative Expenses	$1,040,000	$260,000	$1,300,000
Total Cost and Expenses	$6,560,000	$1,640,000	$8,200,000
Incremental Loss from new business	$1,440,000	($140,000)	$1,300,000

 

Hence the incremental loss of the company is $1,300,000.

Step 3: Company should accept the order or not

The company should not accept this offer because this will decrease its company’s income by $140,000.

Answer

The incremental loss of the company is $140,000.