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# 13.64 - increase of \$21,908 after-tax profit b As shown...

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13.64 (35 min) Special order: Framar Capacity use 75%Tax rate 40% Sales commission rate 10% Sales revenue \$ 25,000,000 Less sales commission 2,500, 000 Net sales 22,500, 000 Expenses Unit-level costs 15,750, 000 Facility-level costs 2,250, 000 14.2857143% of unit-level costs Total costs 18,000, 000 Income before tax 4,500, 000 Taxes 1,800, 000 at 40% Net income \$ 2,700,000 a. Special order (rounded numbers)b. Counter offer Materials \$ 29,200 Sales price \$ 127,000 Labor 56, 000 Sales commission \$ 12,700 Unit-level costs 85, 200 Unit-level costs 85, 200 Facility-level cost @14.2857143% 12, 171 Contribution margin \$ 29,100 Total costs before sales comm. 97, 371 Tax @40% \$ 11,640 Add markup @25% 24, 343 Profit after tax \$ 17,460 Price before sales commission 121, 714 Price after sales commission (÷ 0.9) \$ 135,238 Less relevant costs

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Unit-level costs 85,200 Sales commission @10% 13,524 Contribution margin \$ 36,514 Tax @ 40% 14,606 Profit after tax \$ 21,908 a. Assuming that facility costs are committed and will not change if the order is accepted, Framar will experience an
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Unformatted text preview: increase of \$21,908 after-tax profit. b. As shown above and assuming that facility costs are irrelevant to the decision, the counter offer also is profitable. c. The breakeven price just covers sales commissions and unit-level costs, as follows: Let P = the unknown price 0 = P- 0.1 P – 85,200 0.9 P = 85,200 P = \$94,667 (note that taxes are irrelevant at breakeven) d. Profits will likely fall. Framar originally used a full-cost pricing formula to derive a \$135,238 bid price. A drop in selling price to \$127,000 signifies that the firm is now pricing its orders at less than full cost, which would depress profitability. Reduced prices could lead to an increase in income if the firm is able to generate additional volume. This situation will not occur here: problem data state that Framar has operated and will continue to operate at 75 percent of practical capacity....
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13.64 - increase of \$21,908 after-tax profit b As shown...

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