Pharoah Company new leather briefcase

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.