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.
