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.