Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets
ID: 2487623 • Letter: A
Question
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.
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?
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?
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:
Explanation / Answer
Polaski Company Details Per unit Amt $ Contribution format Income statement Units Sold 29,000 Sales Revenue 58 1,682,000 Direct Materials 25 725,000 Direct Labor 8 232,000 Variable Mfg OH 3 87,000 Variable selling Expense 2 58,000 Total Variable Expense 38 1,102,000 Contribution Margin 20 580,000 Fixed Cost Fixed Mfg OH 324,000 Fixed Selling Expense 216,000 Total Fixed cost 540,000 Net Operating Income 40,000 1 Case 1 Details Per unit Amt $ Contribution format Income statement Units Sold-Regular channel 29,000 Units Sold-special order 7,000 Total Units sold 36,000 Sales Revenue -regular channel 58 1,682,000 Sales Revenue special order of 8000 49 341,040 Total Sales Revenue 2,023,040 Direct Materials 25 900,000 Direct Labor 8 288,000 Variable Mfg OH 3 108,000 Variable selling Expense-Regular channel 2.00 58,000 Variable selling Expense-special order 0.50 3,500 Total Variable Expense 37.71 1,357,500 Contribution Margin 665,540 Fixed Cost Fixed Mfg OH 324,000 Fixed Selling Expense 216,000 Additional cost of machine 14,000 Total Fixed cost 554,000 Net Operating Income 111,540 Net Operating Income increases by = $ 71,540 2 Cost of Producing 7000 units of US Army Units produced Units cost Total for 30000 units Direct Materials 25 Direct Labor 8 Variable Mfg OH 3 Variable selling Expense - Total Variable Expense 36 Fixed Cost per unit Fixed Mfg OH 9 Fixed Selling Expense 6 Total Fixed cost/unit 15 Total Production cost/unit for 7000 units 51 357,000 Add Fess payable by US Army @$1.8 per unit 12,600 Total revenue receivable from US Army offer 369,600 Less Variable cost (relevant )@$36 per order for 7000 units 252,000 Net Increase in Profit from US army Offer= 117,600 ( as no additional fixed cost will be incurred for US order) 3 When Sales made through regulat channel =36000 units Contribution Margin form 36000 units @20 720,000 Less Total Fixed cost 540,000 Net Operating Income = 180,000 When Sales through regular channel =29000 Sales for US army =7000 units Total net Operating Income 29000 units = 40,000 Net Increase in operating income from 7000 units= 117,600 Net Operating Income in this case = 157,600 Net Operating Income decreases by =180000-157600 = $ 22,400.0 if the US army order is accepted in place of regular sale.