WEST VIRGINIA COMPANY

WEST VIRGINIA Company's Widget division has developed a new product, Widget X, that will be marketed
for the first time during the next fiscal year. Although the marketing department estimates that there is adequate
demand to support the sale of 35,000 at a price of$36 per unit,WEST VIRGINIA's management has allocated
only enough manufacturing capacity to produce a maximum of 25,000 units of the new widget annually. The
fixed costs directly associated with the widget are budgeted at $450,000 for the year.WEST VIRGINIA is
currently subject to a 40% income tax rate.
The following budgeted information is available for the production of one unit of Widget X:
5,625 Units

65. The number of units of the new widget that WEST VIR
year in order to break even is
450,000/ (36-14.5)= 20,930.23 units

66. The maximum after-tax profit that can be earned by WEST VIRGINIA Company from sales of
the new widget during the next fiscal year is:
25,000 units x 36= Sales 900,000
14.5 x 25,000 units=
(362,500)
Selling exp 1.5x 25,000 (37,500)
Fixed OH
(450,000)
Income from operations= 50,000 After tax= $30,000
67. WEST VIRGINIA Company's management has stipulated that it will not approve the continued
manufacture of the new widget after the next fiscal year unless the after-tax profit is at least
$75,000 during the first year. The unit selling price needed to achieve this target profit must be at
least
125,000 Before taxes
125,000+450,000/25,000=23+ 16= 39

68. Assume that WEST VIRGINIA is pricing Widget X as originally stated. Meneses Company has
approached WEST VIRGINIA with a special order to purchase 10,000 units of Widget X at a total
price of $300,000. Meneses order will require special packaging, expected to add $1 per unit in
direct materials and $.50 per unit in direct labor. Variable overhead with respect to the order will
be slashed by 60% and no variable selling expenses will be incurred. Fixed costs will remain
unchanged, with the exception of a new folding cartridge, which will be purchased at a cost of
$50,000. This piece of machinery cannot be used in any of WEST VIRGINIA's other operations
and will have no salvage value after the production run is over.
Should WEST VIRGINIA accept the Meneses order as stated? Yes or no AND, by how much
would WEST VIRGINIA be better (or worse) off as a result of this order?
Dm 8 DL 4 VOH 1.6 Fixed 50,000
$300,000- 10,000(8+4+1.6)- 50,000=114,000

69. WEST VIRGINIA is interested in the Meneses account, as they see Meneses as a potentially
growing account. However, they do not want to lose money on the sale. What is the minimum
price that WEST VIRGINIA can charge Meneses on this one-time special orderwithout negatively
affecting profits?
10,000(8+4+1.6)+50,000= 186,000

$___________________________

70. Another division of WEST VIRGINIA uses a widget of lesser quality than the new Widget X, in
the production of their product. They are currently paying only $14 per unit to an outside
supplier for these lesser-quality widgets. The other division would like to incorporate the new
Widget X in their product instead of the current one. They currently use 15,000 of such widgets
per year. WEST VIRGINIA management is willing to allocate an additional capacity of 15,000
widgets specifically for this purpose.This capacity carries a fixed cost of $105,000. Variable costs
related to Widget X will remain unchanged.
WEST VIRGINIA management would like the Widget division to match the $14 price that the
other division is currently paying its outside supplier. Is this a good idea? Yes or no AND WHY.
Be specific. Show any computations.

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