Budgeting Problem
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Herrestad Company sells two products and the details below will be used.
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 $250 460 180
Variable costs per unit
Direct material 100 280 40
Direct labor 50 50 50
Variable overhead 30 45 25
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
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.
- Make a table of the expenses and amounts that are relevant for this decision. How much will the sale of this product contribute to the profitability of Herrestad?
- What if the company only pays $140 per unit? How does this change the contribution towards profitability? Make a table to show the difference.
- If you were the manager, would you accept this order? What considerations, other than financial, would enter into your decision?
See attachment for proper formatting.
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Solution Summary
Complete explanation of a company manufacturing 2 products. Comparison of direct material and direct labor at different sales prices and resulting profits. Complete explanation with MS Word docs including graphs and MS Excel spreadsheet.
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Please see the attached Word document and Excel spreadsheet for correct formatting of the charts.
To answer this question, it would be helpful to first make a chart of the information given to us in the problem. The following chart shows the cost structure of Product C:
(see attachment)
To see how the sale of this product will affect Herrestad's profitability, we must first calculate the contribution margin of each unit. Contribution margin is defined as: (Selling Price Per ...
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