Problem: Herrestad Company sells two products and the details below will be used.
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Background information
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Total
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Prod A
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Prod B
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Beginning inventory
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0
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Units produced
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10,000
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2,500
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7,500
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Units sold
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8,000
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2,000
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6,000
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Selling price per unit
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$250
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460
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180
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Variable costs per unit
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Direct material
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100
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280
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40
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Direct labor
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50
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50
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50
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Variable overhead
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30
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45
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25
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Variable selling and admin. exp.
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10
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13
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9
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Fixed costs
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Fixed manufacturing overhead
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200,000
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Fixed selling and administrative
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100,000
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Production runs (not $)
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100
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65
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35
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Number of sales reps (not $)
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25
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15
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10
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Herrestad Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,000 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $150 per unit, direct materials costs will decrease by $12 per unit and Herrestad does not have to incur any variable selling and administrative expenses.
• Make a table of the expenses and amounts that are relevant for this decision. How much will the sale of this product contribute to the profitability of Herrestad?
• What if the company only pays $140 per unit? How does this change the contribution towards profitability? Make a table to show the difference.
• If you were the manager, would you accept this order? What considerations, other than financial, would enter into your decision?
Answer in 2-4 pages.