Sales revenue $82,500 Less: Sales commissions (82,500x 10%)
Net sale…………………………………………….. 8,250 $74,250 Less costs: Direct material $14,600 Direct labor 28,000 Variable manufacturing overhead* 8,400 Total manufacturing costs 51,000 Income before taxes $ 23,250
Income taxes (40%) 9,300
Net income $ 13,950
*Based on an analysis of the year just ended, variable overhead is 30 percent of direct labor ($1,125 $3,750). For Premier’s Foods’ order: Direct-labor cost x .30 = $28,000 x .30 = $8,400.
2.Yes. Although this amount is below the $82,500 full-cost price, the order is still profitable. Heartland can afford to pick up some additional business, because the company is operating at 75 percent of practical capacity. Sales revenue $63,500 Less: Sales commissions (10%) 6,350 $57,150 Less manufacturing costs: Direct material $14,600 Direct labor 28,000 Variable manufacturing overhead 8,400 Total manufacturing costs…………………… 51,000 Income before taxes $ 6,150
Income taxes (40%) 2,460
Net income $ 3,690
Note that the fixed manufacturing overhead and fixed corporate administration costs are not relevant in this decision, because these amounts will remain the same regardless of what Heartland’s management decides about the order.
3.The break-even price is $56,667, computed as follows:
Let P = break-even bid price
P – 0.1P - $51,000 = 0
0.9P = $51,000
P = $56,667 (rounded)
Income taxes can be ignored, because there is no tax at the break-even point. 4.Profits will probably decline. Heartland originally used a full-cost pricing formula to derive a $82,500 bid price. A drop in the selling price to $63,500 signifies that the firm is now pricing its orders at less than full cost, which would decrease profitability. Reduced prices could lead to an increase in income if the company were able to generate additional volume. This situation will not occur here, because the problem states that Heartland...
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