The Enhanced Products Division of Forrest Industries Makes Ceramic Pots

question 122

Essay

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During the current year, the division produced 10,000 pots and incurred the following costs:
$$\begin{array} { | l | r | } \hline \text { Unit-level materials costs } ( 10,000 @ \$ 15 ) & \$ 150,000 \\\hline \text { Unit-level labor costs } ( 10,000 @ \$ 20 ) & 200,000 \\\hline \text { Unit-level overhead costs } ( 10,000 @ \$ 16 ) & 160,000 \\\hline \text { Depreciation expenses on equipment* } & 12,000 \\\hline \text { Other manufacturing overhead** } & 36,000 \\\hline\end{array}$$ *The equipment was purchased last year for $150,000 and has a current book value of $120,000, remaining useful life of four years, and a zero salvage value. If the equipment is not used to produce ceramic pots, it can be leased for $8,000 per year.**Includes supervisors' salaries and rent for manufacturing plant.Required:
1) Assume Evergreen Industries uses a cost plus pricing strategy. What price should be charged for the ceramic pot product if the division sets its price 40 percent above the unit product cost?
2) A potential overseas customer who would not compete with the division's existing customers would like to purchase 1,000 ceramic pots but is not willing to pay the regular price. At what selling price would the division be indifferent about accepting the special order?
3) Suppose the division has the opportunity to purchase the ceramic pot from another manufacturer for $60.The supplier is willing to hold sufficient inventories to meet Evergreen's demand. Should the division outsource its ceramic pots? Why or why not?

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Definitions:

Multiple-Step

A method of preparing an income statement that separates operating revenues and expenses from non-operating ones, showing multiple levels of income calculation.

Single-Step

Single-step is a simplified method of preparing income statements that calculates net income or loss by subtracting total expenses from total revenues in one step.

Inventory

The raw materials, work-in-process products, and finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale.

Current Asset

An asset that is expected to be converted into cash, sold, or consumed within one year or the operating cycle, whichever is longer.