Bench Industries manufactures large workbenches for industrial use. Recent market analysis indicates that sales are declining for Bench's product because of aggressive competitor pricing. Bench's workbench sells for $800 per unit compared to the competition's comparable workbench sells for $700. Bench's marketing department determined that a price drop to $700 would be necessary to retain market share and continue with annual sales of 14,000 workbenches. The following data are for sales of 14,000 workbenches: Direct materials $3,563,000 Direct labor $975,000 Variable Overhead $400,000 Fixed Overhead $3,910,000 a. What is the current operating income as a percentage of revenue? b. If Bench Industries intends to maintain the same operating income percentage of revenue and lowers the price to $700 what is the target cost per unit

Bench Industries manufactures large workbenches for industrial use. Recent market analysis indicates that sales are declining for Bench's product because of aggressive competitor pricing. Bench's workbench sells for $800 per unit compared to the competition's comparable workbench sells for $700. Bench's marketing department determined that a price drop to $700 would be necessary to retain market share and continue with annual sales of 14,000 workbenches. The following data are for sales of 14,000 workbenches: Direct materials $3,563,000 Direct labor $975,000 Variable Overhead $400,000 Fixed Overhead $3,910,000 a. What is the current operating income as a percentage of revenue? b. If Bench Industries intends to maintain the same operating income percentage of revenue and lowers the price to $700 what is the target cost per unit

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 2P

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Kimball Company has developed the following cost formulas: Materialusage:Ym=80X;r=0.95Laborusage(direct):Yl=20X;r=0.96Overheadactivity:Yo=350,000+100X;r=0.75Sellingactivity:Ys=50,000+10X;r=0.93 where X=Directlaborhours The company has a policy of producing on demand and keeps very little, if any, finished goods inventory (thus, units produced equals units sold). Each unit uses one direct labor hour for production. The president of Kimball Company has recently implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. This policy was implemented because Kimballs industry is in a recession and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that minimally cover their variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Required: 1. Compute the total unit variable cost. Suppose that Kimball has an opportunity to accept an order for 20,000 units at 220 per unit. Should Kimball accept the order? (The order would not displace any of Kimballs regular orders.) 2. Explain the significance of the coefficient of correlation measures for the cost formulas. Did these measures have a bearing on your answer in Requirement 1? Should they have a bearing? Why or why not? 3. Suppose that a multiple regression equation is developed for overhead costs: Y = 100,000 + 100X1 + 5,000X2 + 300X3, where X1 = direct labor hours, X2 = number of setups, and X3 = engineering hours. The coefficient of determination for the equation is 0.94. Assume that the order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information, should the company accept the special order referred to in Requirement 1? Is there any other information about cost behavior that you would like to have? Explain.
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