DATA INPUT
Sales Revenue 12,500$
Less Sales Commission 1,250$ Sales Commission 10%
Net Sales 11,250$
Expenses:
Direct Material 3,000$
Direct Labor 3,750$
Manufacturing Overhead-variable 1,125$
Manufacturing Overhead-fixed 750$
Corporate Administration-fixed 375$
Total Costs 9,000$
Income before Taxes 2,250$
Income Taxes 900$ Tax Rate 40%
Net Income 1,350$
Capacity Utilization 75%
Premier Foods Bid
Estimated direct material 14,600$
Estimated direct labor 28,000$
Estimated manufacturing overhead 14,000$ Cost Driver : Labor 50%
Estimated corporate overhead 2,800$ Cost Driver : Labor 10%
Estimated total costs excluding sales commision 59,400$
Add 25% for profit and taxes 14,850$
Suggested total price adjusting for sales commission
82,500$
SOLUTION
1.
The order will boost Heartland’s net income by 13,950$ as the following calculations will show
Sales Revenue 82,500$
Total Manufacturing costs 51,000$
Income Before Taxes 23,250$
Income Taxes 9,300$
Net Income 13,950$
*Based on an analysis of the year just ended, variable overhead is 30% of direct labor ($1125/$3750)
For Premier Food’s Order: Direct Labor * 0.3 = $28000 * 0.3 = 8,400$
2.
Yes although this amount if below the $82,500 full cost price, the order is still profitable. Heartland can afford to pick up some
additional business, because the company is operation at 75% capacity
Sales Revenue 63,500$
Less Sales Commission 6,350$ 57,150$
Less Manufacturing costs
Estimated manufacturing overhead 14,600$
Less Sales Commission 8,250$ 74,250$
Less Manufacturing costs
Direct Material 14,600$
Direct Labor 28,000$
Variable Manufacturing Overhead* 8,400$