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Fact Pattern:
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Framar, Inc., manufactures machinery to customer specifications. It operated at about 75% of practical capacity during the year. The operating results for the most recent fiscal year are presented below.
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Framar, Inc.
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Income Statement
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For the Year Ended September 30
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(000 omitted)
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Sales
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$25,000
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Minus: Sales commissions
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(2,500)
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Net sales
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$22,500
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Expenses
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Direct materials
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$ 6,000
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Direct labor
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7,500
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Manufacturing O/H-variable
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Supplies
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$ 625
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Indirect labor
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1,500
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Power
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125
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2,250
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Manufacturing O/H-fixed
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Supervision
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$ 500
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Depreciation
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1,000
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1,500
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Corporate administration
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750
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Total expenses
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$18,000
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Net income before taxes
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$ 4,500
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Income taxes (40%)
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(1,800)
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Net income
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$ 2,700
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Top management has developed the pricing formula presented below. It is based upon the operating results achieved during the most recent fiscal year. The relationships used in the formula are expected to continue during the next fiscal year. The company expects to operate at 75% of practical capacity during the next fiscal year.
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APA, Inc., has asked Framar to bid on some custom-designed machinery. Framar used the formula to develop a price and submitted a bid of $165,000. The calculations are given next to the pricing formula shown below.
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Details of Formula
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APA Bid Calculations
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Estimated direct materials cost
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$XXX
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$ 29,200
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Estimated direct labor cost
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XXX
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56,000
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Estimated manufacturing O/H calculated at 50% of DL
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XXX
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28,000
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Estimated corporate O/H calculated at 10% of DL
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XXX
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5,600
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Estimated total costs excluding sales commissions
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$XXX
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$118,800
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Add 25% for profits and taxes
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XXX
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29,700
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Suggested price (with profits) before sales commissions
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$XXX
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$148,500
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Suggested total price equal to suggested price divided by .9 to adjust for 10% sales commissions
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$XXX
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$165,000
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| Question: 14 |
What is the lowest price Framar can charge for this machinery without reducing its net income after taxes? |
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Answer (A) is correct.
The lowest price for the machinery is the total incremental cost associated with the job. It should recover the variable manufacturing costs and the sales commission. Variable manufacturing cost is $102,000, and the sales commission is 10%. Consequently, the minimum sales price is $113,333 [$102,000 ÷ (1.0 – 10%)]. |
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