Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2474915 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below:
Unit
Total
Direct materials
$
20
$
920,000
Direct labor
6
276,000
Variable manufacturing overhead
3
138,000
Fixed manufacturing overhead
7
322,000
Variable selling expense
4
184,000
Fixed selling expense
6
276,000
Total cost
$
46
$
2,116,000
The Rets normally sell for $51 each. Fixed manufacturing overhead is constant at $322,000 per year within the range of 40,000 through 46,000 Rets per year.
Required:
1.
Assume that due to a recession, Polaski Company expects to sell only 40,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 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 6,000 units. This machine would cost $12,000. 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.
Net Profit: increases/decreases? by ?
2.
Refer to the original data. Assume again that Polaski Company expects to sell only 40,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 Rets. The Army would pay a fixed fee of $1.80 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?
Net Profit increases/decreases? by ?
3.
Assume the same situation as that described in (2) above, except that the company expects to sell 46,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 6,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 6,000 Rets were sold through regular channels?
Net Profit: increases/decreases? By ?
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 46,000 Rets per year. Costs associated with this level of production and sales are given below:
Explanation / Answer
Refer following working for your reference
At 46000 Units At 40000 units Sale Price 51 2346000 2040000 Variable costs Direct Material 20 920000 800000 Direct Labor 6 276000 240000 Variable manufacturing 3 138000 120000 Variable selling 4 184000 160000 Total Variable 33 1518000 1320000 Contricution ( Sales - Variable cost) 18.00 828000 720000 Fixed Manufacturing 322000 322000 322000 Fixed Selling 276000 276000 276000 Total Fixed 598000 598000 Net operating income ( Contribution - Fixed costs) 230000 122000 For Additional 6000 units sale refer following workings Sale Price 42.84 257040 = 51 x 84 % ( reduced price by 16 %) Variable costs Direct Material 20 120000 Direct Labor 6 36000 Variable manufacturing 3 18000 Variable selling 1 6000 = 4 x 25 % ( reduced selling expense by 75 %) Additional cost on Machinery 12000 Total cost associated with order 192000 Contricution earned on order 65040 Fixed cost will not be considered again as it has already been recovered during 40000 unts regular sale Now Income for next year on 40000 units 122000 on 6000 units 65040 Total Income 187040 Income for current year 46000 units 230000 Decrease in income 42960