PROBLEM 3-38 (PART LEVEL SUBMISSION)
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.
| Sales price | $41.00 | |
| Variable cost of goods sold | 13.00 | |
| Variable selling expenses | 11.60 | |
| Variable administrative expenses | 4.00 | |
| Annual fixed expenses | ||
| Overhead | $20,592,000 | |
| Selling expenses | 4,092,000 | |
| Administrative expenses | 8,580,000 |
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.
If managers decide to introduce the new leather briefcase, how many units of each briefcase would be required to break even in the coming year? Cost of goods sold for the molded briefcase is expected to be $14.95 per unit.