Polaski Company manufactures and sells a single product called a Ret. Operating

Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below Total Unit $15 690,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 368,000 138,000 322,000 184,000 276,000 7 4 6 Total cost $43 $1,978,000 The Rets normally sell for $48 each. Fixed manufacturing overhead is constant at $322,000 per year within the range of 39,000 through 46,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 39,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 units. This machine would cost $14,000. 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 by

Explanation / Answer

1) New contribution margin Selling price   48*(1-.16) 40.32 less :Variable expense Direct materials 15 Direct labor 8 variable manufacturing overhead 3 variable selling expense (4*25%) 1 total variable expense 27 -27 New contribution margin 13.32 total contribution margin 7000*13.32) 93240 less :cost of machine -14,000 Net income 79240 financail advantage 79,240 net profit increase by $79,240 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 7 total 8.4 total contribution   7000*8.4 58800 financial advantage 58,800 net profit increases by $58,800 (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   48 less :Variable expense Direct materials 15 Direct labor 8 variable manufacturing overhead 3 variable selling expense 4 total variable expense 30 -30 New contribution margin 18 contribution lost (7000*18) -126000 income from Army order 58,800 Net loss -67200 Net profit will decrease by 67200 financial disadvantage 67,200 answer

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