Graydon, Inc. manufactures food blending machinery according to customer specifications. The company operated at 75 percent of practical capacity during the year just ended, with the following results (in thousands):
Sales revenue .................................................................................................................. $25,000
Less: Sales commissions (10%) ......................................................................................... 2,500
Net sales ......................................................................................................................... $22,500
Expenses:
Direct material................................................................................................................. $ 6,000
Direct labor ......................................................................................................................... 7,500
Manufacturing overhead-variable .................................................................................... 2,250
Manufacturing overhead-fixed ........................................................................................ 1,500
Corporate administration-fixed .......................................................................................... 750
Total costs ...................................................................................................................... $18,000
Income before taxes ......................................................................................................... $ 4,500
Income taxes (40%) ............................................................................................................ 1,800
Net income ...................................................................................................................... $ 2,700
Graydon, which expects continued operations at 75 percent of capacity, recently submitted a bid of $165,000 on some custom-designed machinery for Premier Foods, Inc. Graydon used a pricing formula in deriving the bid amount, the formula being based on last year's operating results. The formula follows.
Estimated direct material............................................................................................ $ 29,200
Estimated direct labor .................................................................................................... 56,000
Estimated manufacturing overhead at 50% of direct labor ........................................... 28,000
Estimated corporate overhead at 10% of direct labor..................................................... 5,600
Estimated total costs excluding sales commissions................................................... $118,800
Add 25% for profit and taxes ....................................................................................... 29,700
Suggested price (with profit) before sales commissions ........................................... $148,500
Suggested total price: $148,500  0.9 to adjust for 10% commission ...................... $165,000
Required:
1. Calculate the impact the order would have on Graydon's net income if the $165,000 bid were accepted by Premier Foods, Inc.
2. Assume that Premier has rejected Graydon's bid but has stated it is willing to pay $127,000 for the machinery. Should Graydon manufacture the machinery for the counteroffer of $127,000? Explain your answer and show calculations.
3. At what bid price will Graydon break even on the order?
4. Explain how the profit performance in the coming year would be affected if Graydon accepted all of its work at prices similar to Premier's $127,000 counteroffer described in requirement (2).
5. Construct an Excel spreadsheet to solve requirements (1) and (2) above. Show how the solution will change if the following information changes: the direct material and direct labor for the year just ended were $5,900 and $7,800, respectively; and sales commissions were 8%?