Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2408877 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 20 $ 640,000 Direct labor 8 256,000 Variable manufacturing overhead 3 96,000 Fixed manufacturing overhead 7 224,000 Variable selling expense 4 128,000 Fixed selling expense 6 192,000 Total cost $ 48 $ 1,536,000 The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $224,000 per year within the range of 27,000 through 32,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 27,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski is willing to accept a selling price of $44.52 per Ret, 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.
Explanation / Answer
1) New contribution margin Selling price 53*(1-.16) 44.52 less :Variable expense Direct materials 20 Direct labor 8 variable manufacturing overhead 3 variable selling expense (4*25%) 1 total variable expense 32 -32 New contribution margin 12.52 total contribution margin (5000*12.52) 62600 less :cost of machine -10,000 Net income 52600 financail advantage 52,600 OR net profit increase by 52,600