financial accounting Background information Total Prod A Prod B Beginning invent
ID: 2626468 • Letter: F
Question
financial accounting
Background information
Total
Prod A
Prod B
Beginning inventory
0
Units produced
10,000
2,500
7,500
Units sold
8,000
2,000
6,000
Selling price per unit
$255
480
180
Variable costs per unit
Direct material
100
280
40
Direct labor
60
60
60
Variable overhead
25
40
20
Variable selling and admin. exp.
10
13
9
Fixed costs
Fixed manufacturing overhead
200,000
Fixed selling and administrative
100,000
Production runs (not $)
100
65
35
Number of sales reps (not $)
25
15
10
Differential analysis involves knowing which costs are relevant, i.e. future costs that vary among alternatives. It is important to know what information to use and not just how to execute the analysis.
Herrestad Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,000 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $150 per unit, direct materials costs will decrease by $12 per unit and Herrestad does not have to incur any variable selling and administrative expenses.
I will rate the answer that is best. Please email your answer if your using excel to dave_74_2000@yahoo.com
Background information
Total
Prod A
Prod B
Beginning inventory
0
Units produced
10,000
2,500
7,500
Units sold
8,000
2,000
6,000
Selling price per unit
$255
480
180
Variable costs per unit
Direct material
100
280
40
Direct labor
60
60
60
Variable overhead
25
40
20
Variable selling and admin. exp.
10
13
9
Fixed costs
Fixed manufacturing overhead
200,000
Fixed selling and administrative
100,000
Production runs (not $)
100
65
35
Number of sales reps (not $)
25
15
10
Explanation / Answer
1. Relevant expenses - Direct Material, Direct labor, variable overhead, selling price
Profit without Product C
Profit With Product c@$150 per unit
Profitability increase by $42,000
2. Profit with Product C @$140 per unit
Profitability increase by $32,000
3. Yes, I would accept this offer as it increases the overall profitabilty
Other considerations-
1. New product should not decrease the sales of Product A and B
2. The company should have capacity to produce extra 1000 units of Product C without affcting production of A and B
ProduCt A Product B Total Revenue 960000 1080000 2040000 Variaable cost 786000 774000 1560000 Fixed manufacturing overhead 200000 Fixed selling and administrative 100000 Profit 180000Related Questions
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