Goshford Company produces a single product and has capacity to produce 105,000 units per month. Costs to produce its current sales of 84,000 units follow. The regular selling price of the product is $146 per unit. Management is approached by a new customer who wants to purchase 21,000 units of the product for $77.40 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 $8.00 per unit shipping expense in addition to the regular variable selling and administrative expenses. Per unit Cost at 84,000 units
Direct materials 12.5 1,000,000
Direct labor 15 1,200,000
Variable manufacturing overhead 10 800,000
Fixed manufacturing overhead 17.5 1,400,000
Variable selling and administrative expenses 14 1,120,000
Fixed selling and administrative expenses 13 1,040,000
Totals 82 6,560,000

Required:
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.

Question Completion:

The special offer price is taken as $75.00 and not $77.40 per unit.

Current sales is taken as 80,000 units instead of 84,000 units.

Goshford Company

If Goshford Company accepts the offer to sell additional 21,000 units at the reduced price of $75.00 per unit, the combined total net income is:

$5,445,500.

Explanation:

Data and Calculations:

Monthly production capacity = 105,000 units

Current sales = 80,000 units

Regular unit selling price = $146

Regular sales revenue = $11,680,000 ($146 * 80,000)

Special order selling price = $75.00

Special order quantity = 21,000

Special order sales revenue = $1,575,000 ($75 * 21,000)

Per unit Cost at 80,000 units

Direct materials                 12.5     $1,000,000

Direct labor                        15          1,200,000

Variable

manufacturing overhead 10            800,000

Variable production cost 37.50  $3,000,000

Fixed manufacturing

 overhead                        17.5        1,400,000

Variable selling and

administrative expenses 14          1,120,000

Fixed selling and

administrative expenses 13         1,040,000

Totals                                82       6,560,000

Relevant costs:                          Unit

Variable production cost         37.50

Variable selling and

administrative expenses        14.00

Shipping expense                     8.00

Total relevant cost per unit $59.50

Cost of goods sold:

Regular = $3,000,000 (80,000 * $37.50)

Special = $787,500 (21,000 * $37.50)

Combined Total Net Income:

                                        Regular         Special Order      Total

Sales revenue            $11,680,000       $1,575,000     $13,255,000

Cost of goods sold       3,000,000            787,500         3,787,500

Contribution               $8,680,000         $787,500       $9,467,500

Fixed manufacturing

 overhead                     1,400,000                 0                 1,400,000

Variable selling and admin.

 expenses                     1,120,000            294,000           1,414,000

Fixed selling and admin.

 expenses                   1,040,000                  0                 1,040,000

Shipping expense                                    168,000              168,000

Total expenses          3,560,000            462,000         4,022,000

Net Income               $5,120,000         $325,500       $5,445,500

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