Determine the impact on profits next year
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1. Watson Company manufactures and sells a single product called a JPeg. Operating at capacity the company can produce and sell 30,000 JPegs per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $15 $450,000 Direct labor 8 240,000 Variable manufacturing overhead 3 90,000 Fixed manufacturing overhead 9 270,000 Variable selling expense 4 120,000 Fixed selling expense 6 180,000 Total cost $45 $1,350,000 The JPegs normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Rets per year. Required: a) Assume that due to a recession, Watson Company expects to sell only 25,000 JPegs through regular channels next year. A large retail chain has offered to purchase 5,000 Jpegs, if Watson is willing to accept a 20% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Watson Company would have to purchase a special machine to engrave the retail chain’s name on the 5,000 units. This machine would cost $10,000. Watson Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted. b) Refer to the original data. Assume again that the Watson Company expects to sell only 25,000 JPegs through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 JPegs. The Army would pay a fixed fee of $2.00 per JPeg and would reimburse Watson Company for all costs of production (variable and fixed) associated with the units. Because the Army would pick up the JPegs with its own trucks, there would be no variable selling expenses associated with this order . If Watson Company accepts the order, by how much will profits increase or decrease for the year?
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Posted 18 Dec 2017 06:12 AM
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