Graydon, Inc. manufactures food blending machinery according to customer specifications. The companyoperated at 75 percent of practical capacity during the year just ended, with the following results

(in thousands):

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. 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 $5,900 and $7,800, respectively; and sales commissions were 8 percent

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Sales revenue $25,000 Less: Sales commissions (10%) 2,500 Net sales.......... $22,500 Expenses: Direct material Direct labor Manufacturing overhead-variable. Manufacturing overhead-fixed. $6,000 7,500 2,250 1,500 Corporate administration-fixed Total costs Income before taxes Income taxes (40%) Net income 750 $18,000 $ 4,500 1,800 $ 2,700