Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2464087 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below: The Rets normally sell for $58 each. Fixed manufacturing overhead is constant at $224,000 per year within the range of 25,000 through 32,000 Rets per year. Required: Assume that due to a recession, Polaski Company expects to sell only 25,000 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. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 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? Assume the same situation as that described in (2) above, except that the company expects to all 32,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 7,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 7,000 Rets were sold through regular channels?Explanation / Answer
Part 1)
The incremental profit is calculated with the use of following table:
The profits will increase by $68,040 if the order is accepted.
________
Part 2)
The total increase in profits is calculated as follows:
The profits will increase by $60,200 if the order is accepted.
Notes:
The company will not have to incur any fixed manufacturing overhead with respect to this order as it remains constant within the range of 25,000 to 32,000 rets. However, the company will get reimbursed for it. So, profits will increase by the value of fixed manufacturing overhead.
________
Part 3)
The decrease in profits is calculated as follows:
The profits will decrease by $65,800 if the Army's order is accepted.
Sales Price (58 – 16%*58) 48.72 Less Costs Direct Material 25 Direct Labor 8 Variable Manufacturing Overhead 3 Variable Selling Expenses (4 – 4*75%) 1 Special Machine Cost (14,000/7,000) 2 Incremental Profit Per Unit $9.72