Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2417068 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 36,000 Rets per year. Costs associated with this level of production and sales are given below; The Rets normally sell for $50 each. Fixed manufacturing overhead is constant at $324,000 per year within the range of 27,000 through 36,000 Rets per year. 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 9,000 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 9,000 units. This machine would cost $18,000. 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. Refer to the original data. Assume again that Polaski Company expects to sell only 27,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year? Net profit by Assume the same situation as that described in (2) above, except that the company expects to sell 36,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 9,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 9,000 Rets were sold through regular channels?Explanation / Answer
Solution :
if only 27000 units sold
Direct material
405000
direct labour
270000
variable manufacturing overhead
81000
fixed manufacturing overhead
324000
variable selling expense
54000
fixed selling expense
216000
total cost
1350000
sales value
1350000
net profit
0
1. 27000 units through regular channel + 9000 units of special order
sales value regular channel + special (27000*50)+(9000*50*84%)
1,728,000
total cost as above
1,350,000
decraese in variable selling exp (2*75%*9000)
- 13,500
additional machine cost
9,000
revised total cost
1,345,500
revised net profit
382,500
Increase in net profit
382,500
1. 27000 units through regular channel + 9000 units of army order
sales value - regular channel (27000*50)
1,728,000
sales value - army order 9000*(38.6**)
347,400
total sales value
2,075,400
total cost as above
1,350,000
decraese in variable selling exp (9000*2)
- 18,000
revised total cost
1,332,000
revised net profit
396,000
increase in net profit
396,000
**15+10+3+9+1.6
3.comparing 36000 units regular sales or 27000units regular + 9000 units of army order
sales value - regular channel (36000*50)
1800000
total cost as given
1620000
Profit through regular channel
180000
increase in profit if army order is accepted (396000-180000)
216,000
if only 27000 units sold
Direct material
405000
direct labour
270000
variable manufacturing overhead
81000
fixed manufacturing overhead
324000
variable selling expense
54000
fixed selling expense
216000
total cost
1350000
sales value
1350000
net profit
0
1. 27000 units through regular channel + 9000 units of special order
sales value regular channel + special (27000*50)+(9000*50*84%)
1,728,000
total cost as above
1,350,000
decraese in variable selling exp (2*75%*9000)
- 13,500
additional machine cost
9,000
revised total cost
1,345,500
revised net profit
382,500
Increase in net profit
382,500
1. 27000 units through regular channel + 9000 units of army order
sales value - regular channel (27000*50)
1,728,000
sales value - army order 9000*(38.6**)
347,400
total sales value
2,075,400
total cost as above
1,350,000
decraese in variable selling exp (9000*2)
- 18,000
revised total cost
1,332,000
revised net profit
396,000
increase in net profit
396,000
**15+10+3+9+1.6
3.comparing 36000 units regular sales or 27000units regular + 9000 units of army order
sales value - regular channel (36000*50)
1800000
total cost as given
1620000
Profit through regular channel
180000
increase in profit if army order is accepted (396000-180000)
216,000