Assume that due to a recession, Polaski Company expects to sell only 20,000 Rets
ID: 2501156 • Letter: A
Question
Assume that due to a recession, Polaski Company expects to sell only 20,000 Rets through regular channels next year. A large retail chain has offered to purchase 10,000 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 10,000 units. This machine would cost $20,000. 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 20,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 10,000 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?
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 10,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 10,000 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 30,000 Rets per year. Costs associated with this level of production and sales are given below:
Explanation / Answer
1.
Particulars
If the proposal of Purchase of 10000 Units Accepted(20000+10000)
Sales
$487200
Direct material
$250000
Direct Labor
$80000
Variable Manufacturing Overhead
$30000
Fixed Manufacturing overhead
$0
Variable Selling Expenses
$10000
Fixed Selling expenses
$60000
Cost of machine
$20000
Total Cost
$450000
Incremental Profit
$37200
Sales of (10000 )Units = 10000*58(1-.16)
=$1160000+$487200
= $1647200
Variable Selling Expenses =($4*10000)*(1-.75)
If the company accepts the special Order the Profit will increase by $37200
2.
Particulars
If the proposal of Selling 10000 Units to US Army
Sales($1.4*10000)
$14000
Direct material
$0
Direct Labor
$0
Variable Manufacturing Overhead
$0
Fixed Manufacturing overhead
-$70000
Variable Selling Expenses
$0
Fixed Selling expenses
$0
Total Cost
-$70000
Profit
$84000
Assume that the army will reimburse the Fixed manufacturing Overhead proportionate to the units.
If Posaki Company Accepts the Order the profit will increase by $84000
2.
Particulars
If the proposal of Selling 10000 Units to US Army
If 10000 units Sell Through Regular Channel
Sales
$14000
$580000
Direct material
$0
$250000
Direct Labor
$0
$80000
Variable Manufacturing Overhead
$0
$30000
Fixed Manufacturing overhead
-$70000
$0
Variable Selling Expenses
$0
$40000
Fixed Selling expenses
$0
$60000
Total Cost
-$70000
$460000
Profit
$84000
$120000
If Posaki Company Accepts the Army’s Order it may incur an Profit decrease of Rs.36000 from which were sold through regular channels
Particulars
If the proposal of Purchase of 10000 Units Accepted(20000+10000)
Sales
$487200
Direct material
$250000
Direct Labor
$80000
Variable Manufacturing Overhead
$30000
Fixed Manufacturing overhead
$0
Variable Selling Expenses
$10000
Fixed Selling expenses
$60000
Cost of machine
$20000
Total Cost
$450000
Incremental Profit
$37200