Harmon Company manufactures flour milling machinery according to customer specifications. The company operated at 75 percent of practical capacity during the year just ended, with the following results (in thousands):
Sales revenue …………………………………………$12 500
Less Sales commission (10%) ………………………. 1 250
Net sates ……………………………………………..$11 250
Costs:
Direct material ……………………………………….$ 3 000
Direct labour ………………………………………… 3 750
Manufacturing overhead–variable …………………. 1 125
Manufacturing overhead–fixed ……………………. 750
Corporate administration–fixed ……………………. 375
Total Costs ……………………………………………$ 9 000
Profit before taxes ……………………………………$ 2 250
Income taxes (40%) ………………………………….. 900
Net profit ……………………………………………..$ 1 350
Harmon, which expects continued operations at 75 percent of capacity, recently submitted a bid of $82500 on custom-designed machinery for Holistic Pizza Ltd. Harmon used a pricing formula in deriving the bid amount; the formula being based on last year’s operating results. The formula follows:
Estimated direct material ………………………………..$14 600
Estimated direct labour …………………………………. 28 000
Estimated manufacturing Overhead 50% of labour……… 14 000
Estimated corporate overhead 10% of dirt labour ………. 2 800
Estimated total costs excluding sales commissions……….$59 400
Add 25% income taxes …………………………………… 14850
Suggested price before sales commissions ……………….$74 250
Suggested total price: $74 250 + 0.9
(to adjust for 10% Sales commission) ………………….$82 500
Required
1. Calculate the impact the order would have on Harmon’s profit if the $82 500 bid were accepted by Holistic Pizza Ltd.
2. Assume that Holistic Pizza has rejected 1-larmon’s bid but has stated it is willing to pay $63500 for the machinery. Should Harmon manufacture the machinery for the counter-offer of $63500? Explain your answer and show calculations.
3. At what bid price will Harmon break even on the order?
4. Explain how the profit performance in the coming year would be affected if Harmon accepted all of its work at prices similar to Holistic Pizza’s $63 500 counter-offer described in requirement 2.
5. Construct an Excel spreadsheet to solve requirements 1 and 2, above. Show how the solution will change of the following information changes: direct material was $2 900 000 and direct labour was $3 800 000 for the year just ended, and sales commission was 8 percent.
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