Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below: Unit $ 20 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost Total 960,000 288,000 144,000 432,000 96,000 288,000 2,208,000 $ 46 $ The Rets normally sell for $51 each. Fixed manufacturing overhead is constant at $432,000 per year within the range of 43,000 through 48,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 43,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted. Net profit increases by

Answer 1

1)	New contribution margin
	Selling price		51*(1-.16)			42.84
	less :Variable expense
	Direct materials				20
	Direct labor				6
	variable manufacturing overhead				3
	variable selling expense			(2*25%)	0.5
	total variable expense				29.5	-29.5
	New contribution margin					13.34
	total contribution margin			(5000*13.34)		66700
	less :cost of machine					-10,000
	Net income					56700
	Net income increases by			56,700
2)	Fixed fee				1.6
	Fixed manufacturing overhead reimbursed				9
	total				10.6
	total contribution		5000*10.6		53000
	Net income increase by $53000
	(note though VMOH is also reimbursed ,it is not considered as the same amount
	will be incurred in production also)
3)	original contribution margin per unit
	Selling price					51
	less :Variable expense
	Direct materials				20
	Direct labor				6
	variable manufacturing overhead				3
	variable selling expense				2
	total variable expense				31	-31
	New contribution margin					20
	contribution lost		(5000*20)			-100000
	income from Army order					53,000
	Net loss					-47000
	Net profit will decrease by			-47000

Lost from the Linen Department						693,000
lost from the Hardware department				(2,171,000*15%)		325650
total contribution margin lost						1,018,650
Savings in fixed cost			(820000-372000)			448000
Decrease in profits for the company as whole						570,650
financial disadvantage				570,650
Decrease	in net operating income			570,650
(input the answer figure as negative if required)