Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2425435 • 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:
UNIT TOTAL
Direct materials 20 720,000
Direct Labor 10 360,000
Variable Manufactoring overhead 3 108,000
Fixed Manufacturing Overhead 7 252,000
Variable Selling expense 2 72,000
Fixed selling expense 6 216,000
Total Cost 48 1,728,000
The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $252,000 per year within the range of 26,000 through 36,000 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 10,000 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 10,000 units. This machine would cost $20,000. 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 would __________ by ___________
2.
Refer to the original data. Assume again that Polaski Company expects to sell only 26,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 10,000 Rets. The Army would pay a fixed fee of $1.80 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 would __________ by ___________
3.
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 10,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 10,000 Rets were sold through regular channels?
Net profit would __________ by ___________
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:
Explanation / Answer
Answer a. Statement of Incremental Profit Special Order is accepted Particulars Amount Sales to Retail Chain ($53 X 84% X 10000 nos) 445,200 Less: Direct Material (20 X 10000 Nos) (200,000) Less: Direct Labor (10 X 10000 Nos) (100,000) Less: Variable Manufacturing Overhead ($3 X 10000 Nos) (30,000) Less: Variable Selling Exp. (2 X 25% X 10000 Nos) (5,000) Less: Special Machine Purchased (20,000) Incremetal Profit / (Loss) 90,200 Net profit will be increased by $90200 if order is accepted. Answer b. Statement of Incremental Profit Army Order is accepted Particulars Amount Sales to Army (10000 Units X 41.80) 418,000 Less: Direct Material (20 X 10000 Nos) (200,000) Less: Direct Labor (10 X 10000 Nos) (100,000) Less: Variable Manufacturing Overhead ($3 X 10000 Nos) (30,000) Incremetal Profit / (Loss) 88,000 Net profit will be increased by $88000 if order is accepted. Calculation of SP per Unit to Army Fixed Fees per Ret 1.80 Direct material 20.00 Direct labor 10.00 Variable Manufacturing Overhead 3.00 Fixed Manufacturing Overhead 7.00 Total Selling Price per ret 41.80 Answer c. Statement of Incremental Profit Army Order is accepted Particulars Amount Sales to army (41.80 X 10000 nos) 418,000 Less: Slaes to regular customers ($53 X 10000 Nos) (530,000) Add: Saving of Variable Selling Exp. ($2 X 10000 Nos) 20,000 Incremetal Profit / (Loss) (92,000) Net profit would be decreased by $92000 if order is accepted.