Goshford Company produces a single product and has capacity to produce 180,000 units per month. Costs to produce its current sales of 144,000 units follow. The regular selling price of the product is $144 per unit.

Goshford Company produces a single product and has capacity to produce 180,000 units per month. Costs to produce its current sales of 144,000 units follow. The regular selling price of the product is $144 per unit. Management is approached by a new customer who wants to purchase 36,000 units of the product for $81.00 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 $6.40 per unit shipping expense in addition to the regular variable selling and administrative expenses.
 

	Per Unit				Costs at 144,000 Units
Direct materials		$	12.50			$	1,800,000
Direct labor			15.00				2,160,000
Variable manufacturing overhead			14.00				2,016,000
Fixed manufacturing overhead			17.50				2,520,000
Variable selling and administrative expenses			16.00				2,304,000
Fixed selling and administrative expenses			15.00				2,160,000
Totals		$	90.00			$	12,960,000

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $81.00 per unit.

Determine whether management should accept or reject the new business.

• Accept 
• Reject

Explanation

Calculations:
Normal volume sales: 144,000 units × $144 per unit = $20,736,000
Additional revenue from new order: 36,000 units × $81.00 per unit = $2,916,000
Additional direct materials: 36,000 units × $12.50 per unit = $450,000
Additional direct labor: 36,000 units × $15.00 per unit = $540,000
Additional variable overhead: 36,000 units × $14.00 per unit = $504,000
Additional selling and administrative expense: 36,000 units × ($16.00 + $6.40) per unit = $806,400

Based on this analysis, Goshford should accept the new business.