Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Unit $21.50 14.50 9.50 15.50 4.00 6.00 Total $ 946,000 638,000 418,000 682.000 176,000 264,000 Total cost $71.00 $3,124,000 The Rets normally sell for $76 each. Fixed manufacturing overhead is constant at $682,000 per year within the range of 26,000 through 44,000 Rets per year. Required: 1. Assume that, due to a recession, Polaski Company expects to sell only 26,000 Rets through regular channels next year. A large retail chain has offered to purchase 18,000 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 18,000 units. This machine would cost $36,000. Polaski Company has no assurance that the retail chain will purchase additional units any time in the future. Determine the impact on profits next year if this special order is accepted. in profits

Answer 1

Total Capacity Current Operating Level Special Order Selling Price Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads Variable Selling Expenses Fixed Selling Expenses Total Cost 44000 26000 18000 76 21.50 14.50 9.50 15.50 4.00 6.00 71 Answers 1) Financila Advantage (Net increase) 2) Financial Advantage (Net increase) 3) Financial Disadvantage (Net Decrease) 276120 Increase 327600 Increase 149400 Decrease

1) if Accept the retail Chain Offer at 16% Discount Price. For 18,000 rets Per unit 18000 Units Sales Revenue 63.84 1149120 Direct Material 21.50 387000 Direct labor 14.50 261000 Variable Manufacturing overheads 9.50 171000 Variable Selling Expenses 1.00 18000 Special Machine 36000 Net Operating income From Order 276120 Net profit Increase By 276120 2)IF Accept the US Army Order for Fixed fee of $2.7, and all Manufactruing Cost will Reimburse Per unit 18000 Units Fixed Fee Received 48600 Reimberse the Fixed MOH 15.50 279000 Incremental Net profit 327600 Net profit Increase By 327600

3) IF US Army order Accepted but Operating at full capacity. At Current operating Full Capacity 44000 26000 Units Sales Revnue 3344000 1976000 Direct Material 946000 559000 Direct labor 638000 377000 Variable Manufacturing overheads 418000 247000 Fixed Manufacturing Overheads 682000 682000 Variable Selling Expenses 176000 104000 Fixed Selling Expenses 264000 264000 Total Cost 3124000 2233000 Net Profit 220000 -257000 327600 Increemtnal Analysis Increse in Net profit by Order Lose in profit for the Special Oder = -257000-220000 Decrease in net Profit Net Profit Will Decrase by -477000 -149400 149400