Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2464428 • 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 $56 each. Fixed manufacturing overhead is constant at $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%. 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 $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 $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? 3. 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
1) Per unit 30000 units 22000 units 8000 Total Selling price 56 56 47.04 Selling value 56 1680000 1232000 376320 1608320 Direct material 25 750000 550000 200000 750000 Direct labor 8 240000 176000 64000 240000 Variable manufacturing Overhead 3 90000 66000 24000 90000 Fixed manufacturing overhead 7 210000 210000 16000 226000 refer note Variable selling expenses 2 60000 44000 4000 48000 refer note Fixed selling expense 6 180000 132000 48000 180000 refer note Total cost 1530000 1178000 356000 1534000 Net Income 150000 54000 20320 74320 The net profit will increase by $ 20320, if the retail order is accepted because in the following year only 22000 units are expected to be sold Notes Fixed manufacturing overhead ( additional 8000 units) As fixed overhead will be 210000 for existing 22000 units , the additional fixed manufacturing overhead will be the cost of the machine for $ 16000 as this will have to be expensed in one year as there may not be further orders from the reatil chain Variable selling expenses As no sales commission , for additional 8000 units and the the cost is reduced by 75% , the variable selling expenses for 8000 units is 2*25%=0.50 per unit Fixed selling expenses No additional expense for the additional 8000 units 2) Per unit 30000 units 22000 units 8000 Total Selling price 56 56 50.4 Selling value 56 1680000 1232000 403200 1635200 Direct material 25 750000 550000 200000 750000 Direct labor 8 240000 176000 64000 240000 Variable manufacturing Overhead 3 90000 66000 24000 90000 Fixed manufacturing overhead 7 210000 154000 56000 210000 refer note Variable selling expenses 2 60000 44000 0 44000 Fixed selling expense 6 180000 132000 48000 180000 refer note Total cost 1530000 1122000 392000 1514000 Net Income 150000 110000 11200 121200 Net profit increases by $ 11200 Selling price to US Army Direct material 25 Direct labor 8 Variable manufacturing Overhead 3 Fixed manufacturing overhead 7 Variable selling expenses 0 Fixed selling expense 6 Total cost 49 Add : fixed fee 1.4 Selling price 50.4 Note As the US Army will reimburse all fixed and variable cost , the fixed manufacturing and selling expenses have been alllocated to the 8000 units sold to them 3) Per unit 30000 units 22000 units 8000 Total Selling price 56 56 50.4 Selling value 56 1680000 1232000 403200 1635200 Direct material 25 750000 550000 200000 750000 Direct labor 8 240000 176000 64000 240000 Variable manufacturing Overhead 3 90000 66000 24000 90000 Fixed manufacturing overhead 7 210000 154000 56000 210000 Variable selling expenses 2 60000 44000 0 44000 Fixed selling expense 6 180000 132000 48000 180000 Total cost 1530000 1122000 392000 1514000 Net Income 150000 110000 11200 121200 If all the units are sold through regular channels Net Income 150000 Ai the army order is accepted Net Income 121200 Net profit will decrease by 28800