Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2436734 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 50,000 Rets per year. Costs associated with this level of production and sales are as follows ni Total Direct materials Direct labour Variable manufacturing $23.00 $1,150,000 800,000 16.00 11.00 550,000 overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 17.00 4.00 6.00 850,000 200,000 300,000 Total cost $77.00 $3,850,000 The Rets normally sell for $82 each. Fixed manufacturing overhead is constant at $850,000 per year within the range of 29,000 through 50,000 Rets per year Required: 1. Assume that, due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 21,000 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 21,000 units. This machine would cost $42,000. Polaski Company has no assurance that the retail chain will purchase additional units any time in the future. Determine the impact on profits next year if this special order is accepted in profits 2. Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 Rets through regular channels next year. The Canadian Forces would like to make a one-time-only purchase of 21.000 Rets. The Forces would pay a fixed fee of $3.00 per Ret, and in addition it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Since the Forces would pick up the Rets with its own trucks, there would be no variable selling expenses of any type associated with this order. If Polaski Company accepts this order, by how much will profits be increased or decreased for the year? inExplanation / Answer
1 21000 rets Per unit Amount Selling price 68.88 1446480 Less Expense Direct material 23 483000 Direct labor 16 336000 Variable manufacturing overheads 11 231000 Variable selling expense 1 21000 Special machine 42000 Total expense 1113000 Net operating profit 333480 Increase in profit 333480 2 21000 Rets Fixed fees 3 Direct material 23 Direct labor 16 Variable manufacturing overheads 11 Fixed manufacturing overheads 17 Total selling price 70 1470000 Expense Direct material 23 483000 Direct labor 16 336000 Variable manufacturing overheads 11 231000 Total expense 50 1050000 Net operating profit increase by 20 420000 3 Canadian forces Regular channels Fixed fees 3 Direct material 23 Direct labor 16 Variable manufacturing overheads 11 Fixed manufacturing overheads 17 Total selling price 70 82 Expense Direct material 23 23 Direct labor 16 16 Variable manufacturing overheads 11 11 Variable selling expense 0 4 Total expense 50 54 Net operating profit increase by 20 28 Difference 8 Units 21000 Rets Decrease in profit 168000