Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2431249 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $680,000 340,000 02,000 238,000 136,000 204.000 $1,700,000 S 20 10 S 50 The Rets normally sell for $55 each. Fixed manufacturing overhead is constant at $238,000 per year within the range of 27,000 through 34,000 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 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 et profitExplanation / Answer
requirement 1
Statement of Additional Revenue
Additional revenue
(46.2*7000)
$ 323,400.00
Additional Expenses
Direct Material
(20*7000)
$ 140,000.00
Direct Labor
(10*7000)
$ 70,000.00
Variable Manufacturing Expense
(3*7000)
$ 21,000.00
Variable Selling Expense
(1*7000)
$ 7,000.00
Purchase of New Machine
$ 14,000.00
Total Additional Cost
$ 252,000.00
Additional Benefit
$ 71,400.00
Answer - Net Income Will Increase by $71400
Note-- Full cost of Machine will be depreciated because it will not be used in future or for any other purpose except this special order.
Requirement 2
Additional Benefit of Accepting offer.
Fixed Fee
(1.40*7000)
$ 9,800.00
Reimbursement of Fixed cost
(7*7000)
$ 49,000.00
Total Additional Benefit
$ 58,800.00
Answer - Net Income Will Increase by $58800
Notes:
Variable cost is not considered for any calculation as variable cost will be reimbursed.
Fixed cost reimbursed is Considered as additional benefit because no extra cost is incurred for these 7000 units, But cost is reimbursed.
Requirement 3
Contribution Loss on not selling 7000 units in regular market.
Sales price
$ 55.00
Less: Variable Cost
Direct Material
$ 20.00
Direct Labor
$ 10.00
Variable Manufacturing Expense
$ 3.00
Variable Selling Expense
$ 4.00
Contribution Per Unit
$ 18.00
No of Units
7000
Total Contribution loss
$ 126,000.00
Total Return on Special Army Offer
(1.4*7000)+49000
$ 58,800.00
Net Profit Decrease by
(126000-58800)
$ 67,200.00
Note- The company is losing its Regular sales and ultimately not earning the contribution it can earn on regular sales.
Return on Regular sales is more than in Special order.
Financial Disadvantage of Accepting Offer is $672000.
requirement 1
Statement of Additional Revenue
Additional revenue
(46.2*7000)
$ 323,400.00
Additional Expenses
Direct Material
(20*7000)
$ 140,000.00
Direct Labor
(10*7000)
$ 70,000.00
Variable Manufacturing Expense
(3*7000)
$ 21,000.00
Variable Selling Expense
(1*7000)
$ 7,000.00
Purchase of New Machine
$ 14,000.00
Total Additional Cost
$ 252,000.00
Additional Benefit
$ 71,400.00