Product contribute to the profitability of herrestad


Problem: Herrestad Company sells two products and the details below will be used.

Background information

 

 

 

 

 Total

 Prod A

Prod B

Beginning inventory

 0  

 

 

Units produced

 10,000

 2,500

 7,500

Units sold

 8,000

 2,000

 6,000

 

 

 

 

Selling price per unit

 $250

 460

 180

Variable costs per unit

 

 

 

  Direct material

 100

 280

 40

  Direct labor

 50

 50

 50

  Variable overhead

 30

 45

 25

  Variable selling and admin. exp.

 10

 13

 9

 

 

 

 

Fixed costs

 

 

 

  Fixed manufacturing overhead

 200,000

 

 

  Fixed selling and administrative

 100,000

 

 

 

 

 

 

 


 

 

Production runs (not $)

100

65

35

Number of sales reps (not $)

 25

 15

10


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.

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Finance Basics: Product contribute to the profitability of herrestad
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