Heartland Corporation manufactures flour milling machinery according to customer specifications. The company operated at 75 percent of

Question:

Heartland Corporation manufactures flour milling 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....................................................................................$12,500

Less: Sales commissions (10%)........................................................ 1,250

Net sales...........................................................................................$11,250

Expenses:

Direct material.................................................................................$ 3,000

Direct labor...................................................................................... 3,750

Manufacturing overhead—variable................................................. 1,125

Manufacturing overhead—fixed..................................................... 750

Corporate administration—fixed.................................................... 375

Total costs.......................................................................................$ 9,000

Income before taxes.........................................................................$ 2,250

Income taxes (40%)......................................................................... 900

Net income......................................................................................$ 1,350

Heartland, which expects continued operations at 75 percent of capacity, recently submitted a bid of $82,500 on custom-designed machinery for Premier Foods, Inc. In deriving the bid amount, Heart-land used a pricing approach based on last year’s operating results. The calculations are as follows.

Estimated direct material ...........................................................................$14,600

Estimated direct labor................................................................................. 28,000

Estimated manufacturing overhead at 50% of direct labor......................... 14,000

Estimated corporate overhead at 10% of direct labor.................................. 2,800

Estimated total costs excluding sales commissions......................................$59,400

Add 25% for profit and taxes...................................................................... 14,850

Suggested price (with profit) before sales commissions..............................$74,250

Suggested total price: $74,250 4 0.9 to adjust for 10% commission...........$82,500


Required:

1. Calculate the impact the order would have on Heartland’s net income if the $82,500 bid were accepted by Premier Foods, Inc.

2. Assume that Premier has rejected Heartland’s bid but has stated it is willing to pay $63,500 for the machinery. Should Heartland manufacture the machinery for the counteroffer of $63,500? Explain your answer and show calculations.

3. At what bid price will Heartland break even on the order?

4. Explain how the profit performance in the coming year would be affected if Heartland accepted all of its work at prices similar to Premier’s $63,500 counteroffer described in requirement (2).

5. Build a spreadsheet: 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 $2,900,000 and $3,800,000 respectively; and sales commissions were 8%.

(CMA, adapted)


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