Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2459652 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below: The Rets normally sell for dollar 56 each. Fixed manufacturing overhead is constant at dollar 210,000 per year within the range of 22,000 through 30,000 Rets per year. Required: Assume that due to a recession, Polaski Company expects to sell only 22,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 percentage. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 8,000 units. This machine would cost dollar 16,000. 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 22,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of dollar 1.40 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? Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 8,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 8,000 Rets were sold through regular channels?Explanation / Answer
Polaski Company Details Per unit Amt $ Contribution format Income statement Units Sold 22,000 Sales Revenue 56 1,232,000 Direct Materials 25 550,000 Direct Labor 8 176,000 Variable Mfg OH 3 66,000 Variable selling Expense 2 44,000 Total Variable Expense 38 836,000 Contribution Margin 18 396,000 Fixed Cost Fixed Mfg OH 210,000 Fixed Selling Expense 180,000 Total Fixed cost 390,000 Net Operating Income 6,000 1 Case 1 Details Per unit Amt $ Contribution format Income statement Units Sold 22,000 Sales Revenue -regular channel 56 1,232,000 Sales Revenue special order of 8000 47 376,320 Total Sales Revenue 1,608,320 Direct Materials 25 750,000 Direct Labor 8 240,000 Variable Mfg OH 3 90,000 Variable selling Expense =2 and 2*0.25 48,000 Total Variable Expense 36.00 1,128,000 Contribution Margin 480,320 Fixed Cost Fixed Mfg OH 226,000 Fixed Selling Expense 180,000 Total Fixed cost 406,000 Net Operating Income 74,320 Net Operating Income increases by = $ 68,320 2 Cost of Producing 8000 units when total production is 30000 unit Units produced Units cost Total for 30000 units Direct Materials 25 Direct Labor 8 Variable Mfg OH 3 Variable selling Expense - Total Variable Expense 36 Fixed Cost per unit Fixed Mfg OH 7 210,000 Fixed Selling Expense 6 180,000 Total Fixed cost/unit 13 390,000 Total Production cost/unit for 8000 units 49 390,000 Details Per unit Amt $ Contribution format Income statement Units Sold 22,000 Sales Revenue -regular channel 56 1,232,000 Fixed fee for 8000 units @1.4 11,200 Reimbursement for 8000 units @49 392,000 Total Sales Revenue 1,635,200 Direct Materials 25 750,000 Direct Labor 8 240,000 Variable Mfg OH 3 90,000 Variable selling Expense for 22000units 2.00 44,000 Total Variable Expense 38.00 1,124,000 Contribution Margin 511,200 Fixed Cost Fixed Mfg OH 210,000 Fixed Selling Expense 180,000 Total Fixed cost 390,000 Net Operating Income 121,200 Net Operating Income increases by = $ 115,200 3 Àssume 30000 units sold thru regular channel Details Per unit Amt $ Contribution format Income statement Units Sold 30,000 Sales Revenue 56 1,680,000 Direct Materials 25 750,000 Direct Labor 8 240,000 Variable Mfg OH 3 90,000 Variable selling Expense 2 60,000 Total Variable Expense 38 1,140,000 Contribution Margin 18 540,000 Fixed Cost Fixed Mfg OH 210,000 Fixed Selling Expense 180,000 Total Fixed cost 390,000 Net Operating Income 150,000 Net Operating Income decreases by =150000-74320= 75,680 of the US army order is accepted in place of regular sale.