Question

The sales manager of Trisha’s Global Marketing (TGM) is considering expanding sales by taking their Original Widget and modifying it for export into the European and Asian markets. Relatively minor cosmetic changes will be made to enhance appeal to local tastes. After reviewing the sales forecasts, the sales department feels that 50% of units sold will be the Original product, 30% will be new Euro and the remainder will be the new Pacific.

The information in the table has been assembled by the sales and production departments. The common fixed costs associated with the manufacture of these three products are $1,920,000 per year and TGM has a marginal tax rate of 25%.

	Original	Euro	Pacific
Sales Price (per unit)	$65.00	$75.00	$70.00
Material cost (per unit)	$26.00	$28.00	$23.00
Direct labor (per unit)	$13.00	$14.00	$15.00
Variable OH (per unit)	$17.00	$16.00	$16.00

If the target sales mix is achieved and 180,000 total units are sold, calculate the estimated total profit before taxes if a process improvement can reduce the direct labor cost of each unit by $0.75. No other assumptions are changed.

Calculate the increment in total profit before taxes if a special order of 30,000 European units is accepted from a European retail chain at a price of $66 per unit. This units will be sold under the house brand of the retailer and are not expected to change sales through normal distribution channels. However, additional packaging costs of $90,000 would have to be incurred. No other assumptions are changed.

Answer 1

a. calculate the estimated total profit before taxes = $384000

2. Incremental profit before taxes in case of special order

Units * (Sale price - variable cost) - Packaging cost

30000 * (66 - 58) - 90000

240000 - 90000

Incremental profit before taxes = $150000