EagleCo produces and sells Eudolls, an electronic doll thats popular with children. Eudolls are purchased in many
Question:
EagleCo produces and sells “Eudolls”, an electronic doll that’s popular with children. Eudolls are purchased in many countries, but they are most popular in Europe. The actual average selling price per Eudoll, throughout 2022, was $25 per unit.
The 2022 actual average cost per unit, based on the actual 2022 production and sales volume of 250,000 Eudolls, is provided below:
Production costs per unit:
Direct Materials $ 6.00
Direct Labor 4.00
Variable manufacturing overhead 2.00
Fixed manufacturing overhead 3.00
Total manufacturing costs per unit $15.00
Nonmanufacturing costs per unit:
Variable shipping costs $ 1.50
Variable selling commissions and marketing costs 1.50
Fixed marketing & administrative costs 1.00
Total nonmanufacturing costs per unit $4.00
Total cost per unit $19.00
Each situation described in each question below is independent of the others. Unless stated otherwise, assume that the cost behavior patterns, selling price, and production and sales volume stated above will continue into the future. Assume decision makers are rational profit maximizers.
1. Compute the following:
(a) What is EagleCo’s breakeven point in annual sales dollars?
(b) Assume an income tax rate of 30% of pretax/operating income, at what level of sales in units for the year would EagleCo achieve an after-tax profit (aka net income) of $1,200,000 for that year?
(c) If EagleCo expects 2023 sales volume to be 20% higher than 2022 sales volume, then what would their pretax operating income level be in 2023?
2. EagleCo was approached by BuyerCo, a potential new customer for EagleCo. BuyerCo asked EagleCo to produce and sell an additional 5000 (beyond EagleCo’s normal production and sales volume level of 250,000) “Eudolls” to BuyerCo at the special-order price of $16 per unit. BuyerCo indicated that if EagleCo agrees to this proposal, then BuyerCo would pick up these units from EagleCo’s plant, saving EagleCo 50% of their variable shipping costs related to this order.
If EagleCo rejects BuyerCo’s offer, then they would continue to produce and sell at EagleCo’s normal (2022) volume, price and costs. Should EagleCo accept or reject this special-order offer?
How much is the impact to (pretax) operating income from this decision?
Assume EagleCo has sufficient excess capacity to handle the normal volume and this special-order volume, and this special order will not affect other customer orders.
3. EagleCo recently received an offer from an outside manufacturing firm, ProduceIt. The offer is for ProduceIt to produce and ship to EagleCo’s customers the units that EagleCo sells. If the offer is accepted, EagleCo’s total fixed manufacturing overhead costs would decrease by 70%. EagleCo’s nonmanufacturing costs would be unaffected by the proposal except for a reduction in its variable shipping costs by $1 per unit.
(a) Assume that ProduceIt’s proposed price to EagleCo is $16 per unit. Compare the alternatives of making versus buying at EagleCo’s normal volume level. Should EagleCo accept the proposal from ProduceIt? How much is the operating income impact of doing this in 2023, assuming volume is unaffected?
(b) At what volume level is EagleCo indifferent between making or buying, given ProduceIt’s proposed price of $16 per unit?
Expert Answer:
1 Compute the following a To find EagleCos breakeven point in annual sales dollars we need to determine the number of units they need to sell to cover their fixed costs The fixed costs per unit are th... View the full answer
