Hartford, Inc. manufactures a single product. Shown are projected revenues and costs based on last year's income statement (8,000 units) and practical capacity (10,000 units). The costs are either variable, fixed, or mixed (part variable and part fixed.) You need to figure out what the cost type is based on the cost behavior.Last Year(8,000 units) Practical Capacity(10,000 units) Total Per Unit Total Per UnitRevenue $800,000 $100.00 $1,000,000 $100.00Costs: Direct Material $200,000 $25.00 $250,000 $25.00Direct Labor $160,000 $20.00 $200,000 $20.00Mfg. Overhead $180,000 $22.50 $200,000 $20.00Selling Expenses $40,000 $5.00 $50,000 $5.00Admin. Expenses $50,000 $6.25 $50,000 $5.00Total Costs $630,000 $78.75 $750,000 $75.00Pre-Tax Profit $170,000 $250,000 RequiredAssume that Hartford expects to sell the same number of units as last year in their normal distribution channels (8,000 units). They have received an offer from a one-time customer (not part of their normal customer mix) to buy 1,000 units (additional to their expected normal sales) at a price of $71. By how many dollars would pre-tax profit increase or decrease if Hartford accepts the special order? (9 points)

Answer:

Hartford, Inc.

If Hartford accepts the special order, the pre-tax profit would increase by

= $21,000.

Explanation:

a) Data and Calculations:

Production and sales capacity last year = 8,000 units

Practical capacity = 10,000 units

                                         Last Year                Practical Capacity

                                      (8,000 units)                  (10,000 units)

                                Total         Per Unit           Total         Per Unit

Revenue                 $800,000  $100.00      $1,000,000  $100.00

Costs:

Direct Material       $200,000   $25.00        $250,000    $25.00

Direct Labor            $160,000   $20.00        $200,000    $20.00

Mfg. Overhead       $180,000   $22.50        $200,000    $20.00

Selling Expenses     $40,000     $5.00          $50,000       $5.00

Admin. Expenses    $50,000     $6.25          $50,000       $5.00

Total Costs            $630,000   $78.75        $750,000     $75.00

Pre-Tax Profit         $170,000                       $250,000

Variable cost per unit              $50.00                              $50.00

Fixed cost            $230,000                        $250,000

Sales revenue from the one-time customer = $71,000

Variable cost per unit                                         50,000

Additional pre-tax profit (increase)                  $21,000                    

On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement:
1. The agreement requires rental payments of $100,000 at the beginning of each year.
2. The cost and fair value of the building on January 1, 2019, is $2 million. The storage building has not been specialized for Caswell.
3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method.
4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor.
5. Caswell’s incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate.
6. Executory costs of $7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year.
Required:
1. Determine what type of lease this is for the lessee.
2.
Prepare appropriate journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.
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Record the payments and expenses related to this lease on December 31 for 2020.
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