Problem 7: Accept New Business (based on Ex 23-3)

Gill Company produces a single produce and has capacity to produce 40,000 units per month. The company sells these units for $15 each. Costs and expenses for the normal volume of budgeted production for 20,000 units are below.

	Per unit
Direct materials ..............................................................	$2.50
Direct labor .....................................................................	1.60
Variable manufacturing overhead...................................	1.05
Fixed manufacturing overhead........................................	1.65
Variable selling and administrative expenses.................	1.50
Fixed selling and administrative expenses......................	1.20
Total Cost...........................................................	$9.50

The Company has an opportunity to sell 4,000 additional units at $11 per unit. The additional sales would not affect their current sales. The additional volume would create no additional fixed selling and administrative expenses; however, the variable selling and administrative expenses will increase by $0.70 per unit. In addition, the labor rate will increase by 50% for additional overtime to meet the customer delivery date.

Determine whether management should accept or reject the new business by determining the Net Income for the normal volume at 20,000 units, the additional volume of 4,000 units and the combined total.

	Normal Volume 20,000 units	Additional Volume 4,000 units	Combined Total 24,000 units
Sales
Costs and expenses
Direct materials
Direct labor
Variable overhead
Fixed overhead
Variable selling and admin. exp.
Fixed selling and admin. exp.
Total costs and expenses
Net income

Calculations