Question

Heartland Corporation 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 commissions (10%)........................................................ 1,250
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 (40%)......................................................................... 900
Net income...................................................................................... $ 1,350
Heartland, which expects continued operations at 75 percent of capacity, recently submitted a bid of $82,500 on custom-designed machinery for Premier Foods, Inc. In deriving the bid amount, Heart-land used a pricing approach based on last year’s operating results. The calculations are as follows.
Estimated direct material ........................................................................... $14,600
Estimated direct labor................................................................................. 28,000
Estimated manufacturing overhead at 50% of direct labor......................... 14,000
Estimated corporate overhead at 10% of direct labor.................................. 2,800
Estimated total costs excluding sales commissions...................................... $59,400
Add 25% for profit and taxes...................................................................... 14,850
Suggested price (with profit) before sales commissions.............................. $74,250
Suggested total price: $74,250 4 0.9 to adjust for 10% commission........... $82,500

Required:
1. Calculate the impact the order would have on Heartland’s net income if the $82,500 bid were accepted by Premier Foods, Inc.
2. Assume that Premier has rejected Heartland’s bid but has stated it is willing to pay $63,500 for the machinery. Should Heartland manufacture the machinery for the counteroffer of $63,500? Explain your answer and show calculations.
3. At what bid price will Heartland break even on the order?
4. Explain how the profit performance in the coming year would be affected if Heartland accepted all of its work at prices similar to Premier’s $63,500 counteroffer described in requirement (2).
5. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (1) and (2) above. Show how the solution will change if the following information changes: the direct material and direct labor for the year just ended were $2,900,000 and $3,800,000 respectively; and sales commissions were 8%.
(CMA, adapted)



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  • CreatedApril 22, 2014
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