The company has an opportunity to sell 40,000 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 16% and (2) administrative expenses would increase by $172,000. Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit.

$1,576,000

Explanation:

The computation of the combined total net income is shown below:

Particulars     Normal volume  Additional volume  Combined total

Sales              $6,000,000         $480,000               $6,480,000

                                                (40,000 × $12)

Less: Costs and expenses    

Direct material $800,000            $80,000               $880,000

                                          ($800,000  ÷ 400,000 × 40,000)

Direct labour    $1,600,000         $160,000             $1,760,000

                                        ($1,600,000 ÷ 400,000 × 40,000)

Overhead        $400,000          $64,000                $464,000

                                                ($400,000 × 16%)

Selling expenses $600,000     $0                         $600,000

Administrative

expense           $1,028,000   $172,000                $1,200,000

Total costs

and expenses $4,428,000    $476,000             $4,904,000

Incremental

income

(loss) from

new busines   $1,572,000   $4,000               $1,576,000

We assume reduced price of $12 per unit instead of $13 per unit

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