Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2487621 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 36,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 25 $ 900,000 Direct labor 8 288,000 Variable manufacturing overhead 3 108,000 Fixed manufacturing overhead 9 324,000 Variable selling expense 2 72,000 Fixed selling expense 6 216,000 Total cost $ 53 $ 1,908,000 The Rets normally sell for $58 each. Fixed manufacturing overhead is constant at $324,000 per year within the range of 29,000 through 36,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 29,000 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. NET PROFIT:(INCREASES/DECREASES) BY: __________? 2. Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 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 $1.80 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 36,000 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? NET PROFIT:(INCREASES/DECREASES) BY: __________?Explanation / Answer
Information Given Company Can Produce & Sell 36000 Rets Annually Total Cost $ Perunit Cost$ unit Total Direct Material 900,000 25 36,000 Total Direct Labour 288,000 8 36,000 Variable Manuf. overhead 108000 3 36,000 Fixed manuf. overhead 324000 9 36,000 Variable Selling Exp 72000 2 36,000 Fixed Selling Exp 216000 6 36,000 1,908,000 53 36,000 Rets Normally Sell @ 58 Fixed Overhead Fixed in Range of Rets Manuf 29000-36000 unit Required 1 Company expect to sell 29000 unit annually Large Retail Chain ready to purchase 7000 Rets With a discount of 16% on regular price Variable Selling Expense slashed by 75% Special machine purchase 14000 $ Unit sold 29000 unit sold 7000 unit sold Particulars Rate Amount Rate Amount Sale Value 58 1682000 48.72 341040 Less :- Direct Material 25 725000 25 175000 Direct Labour 8 232000 8 56000 Variable overhead 3 87000 3 21000 Fixed overhead 324000 0 Variable Selling Exp 2 58000 0.5 3500 Fixed Selling Exp 216000 0 Special Machine Cost 14000 Net Profit 40000 71540 Total Profit (40000+71540) 111540 Answer- Total profit increase by 71540 due to acceptence of 7000 unit addition order Required 2 Company expect to sell 29000 unit annually US army to purchase 7000 Rets Army would pay Fixed fee $ 1.8 per Rets Reimburse all cost of production So Effective Selling Rate would be Fixed fee 1.8+(25+8+3+9)=46.8 No Variable selling expense Unit sold 29000 unit sold 7000 unit sold Particulars Rate Amount Rate Amount Sale Value 58 1682000 46.8 327600 Less :- Direct Material 25 725000 25 175000 Direct Labour 8 232000 8 56000 Variable overhead 3 87000 3 21000 Fixed overhead 9 261000 9 63000 Variable Selling Exp 2 58000 0 Fixed Selling Exp 216000 0 Special Machine Cost Net Profit 103000 12600 Total Profit (103000+12600) 115600 Required 2 Company expect to sell 36000 unit annually normally US army to purchase 7000 Rets Army would pay Fixed fee $ 1.8 per Rets Reimburse all cost of production So Effective Selling Rate would be Fixed fee 1.8+(25+8+3+9)=46.8 No Variable selling expense Unit sold 36000 unit sold Particulars Rate Amount Sale Value 58 2088000 Less :- Direct Material 25 900000 Direct Labour 8 288000 Variable overhead 3 108000 Fixed overhead 9 324000 Variable Selling Exp 2 72000 Fixed Selling Exp 6 216000 Net Profit 180000 Answer :- In 3rd situation when company expect to sale 36000 unit then profit is 180000 and when accept Army order then profit will be 115600 i.e profit decrease by 64400$