Pharoah Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes.
|Variable cost of goods sold||13.00|
|Variable selling expenses||11.60|
|Variable administrative expenses||4.00|
|Annual fixed expenses|
Pharoah can produce 3,960,000 cases a year. The projected net income for the coming year is expected to be $4,752,000. Pharoah is subject to a 40% income tax rate.
During the planning sessions, Pharoah’s managers have been reviewing costs and expenses. They estimate that the company’s variable cost of goods sold will increase 15% in the coming year and that fixed administrative expenses will increase by $396,000. All other costs and expenses are expected to remain the same.
pharoah Company’s managers are considering expanding the product line by introducing a leather briefcase. The new briefcase is expected to sell for $91.00; variable costs would amount to $37.00 per briefcase. If Pharoah introduces the leather briefcase, the company will incur an additional $792,000 per year in advertising costs. Pharoah’s marketing department has estimated that one new leather briefcase would be sold for every four molded briefcases.
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