Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2516028 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 38,000 Rets per year. Costs associated with this level of production and sales are given below:
The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $266,000 per year within the range of 30,000 through 38,000 Rets per year.
Required:
Part 1. Assume that due to a recession, Polaski Company expects to sell only 30,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 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 8,000 units. This machine would cost $16,000. 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 ____________ by ____________
Part 2. Refer to the original data. Assume again that Polaski Company expects to sell only 30,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of $1.20 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 ____________ by ______________
Part 3. Assume the same situation as that described in (2) above, except that the company expects to sell 38,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 8,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 8,000 Rets were sold through regular channels?
Net Profit _____________ by ___________
Explanation / Answer
Part 1
Net Profit _increase_____ by __ 84,160
Working :-
Total for 30000
Total for 8000
Direct materials
30000
600,000
8000
160,000
Direct labor
30000
240,000
8000
64,000
Variable manufacturing overhead
30000
90,000
8000
24,000
Fixed manufacturing overhead
Fixed from 30000 to 38000 units
266,000
Special Machine
16,000
Variable selling expense
30000
120,000
8000
8,000
Fixed selling expense
Assuming this is already incurred and fixed
228,000
Total cost
$
1,544,000
$
272,000
Sale
53*30000
1590000
(53*84%)*8000
356160
Net Profit
Sale - Cost
46,000
84,160
Part2
Net Profit _increase___ by ____9600_
Working :-
Total for 30000
Total for 8000
Direct materials
30000
600,000
Reimbursed
0
Direct labor
30000
240,000
Reimbursed
0
Variable manufacturing overhead
30000
90,000
Reimbursed
0
Fixed manufacturing overhead
Fixed from 30000 to 38000 units
266,000
Variable selling expense
30000
120,000
Reimbursed
0
Fixed selling expense
Assuming this is already incurred and fixed
228,000
Total cost
$
1,544,000
$
0
Sale
53*30000
1590000
1.2*8000
9600
Net Profit
Sale - Cost
46,000
9,600
Part3
Net Profit _decrease___ by ____134400_
Working :-
Total for 30000
Total for 8000
Direct materials
30000
600,000
8000
160,000
Direct labor
30000
240,000
8000
64,000
Variable manufacturing overhead
30000
90,000
8000
24,000
Fixed manufacturing overhead
Fixed from 30000 to 38000 units
266,000
Special Machine
16,000
Variable selling expense
30000
120,000
8000
8,000
Fixed selling expense
Assuming this is already incurred and fixed
228,000
Total cost
$
1,544,000
$
272,000
Sale
53*30000
1590000
(53*84%)*8000
356160
Net Profit
Sale - Cost
46,000
84,160