Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets
ID: 2481387 • Letter: A
Question
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 9,000 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 9,000 units. This machine would cost $18,000. 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.
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 34,000 Rets per year. Costs associated with this level of production and sales are given below:Explanation / Answer
Note 1:
As there is no guarantee that the company will receive the order again, total cost of the new machine has been charged against the profit of these 9000 units.
Note 2:
The fixed manufacturing overhead and fixed selling expenses are for the capacity of 34000 units and will not be affected for the additional 9000 units over and above 25000 regular units. [9000 + 25000 = 34000]
Sales ($55 x 9000 x 84%) $ 4,15,800 Less: Variable expenses Material ($20*9000) $ 1,80,000 Direct Labour ($10 x 9000) $ 90,000 Variable manufacturing overhead ($3 x 9000) $ 27,000 Variable selling expenses ($2 x 9000 x 25%) $ 4,500 $ 3,01,500 Contribution $ 1,14,300 Less: cost of the special machine $ 18,000 Net increase in income $ 96,300