Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2527791 • Letter: P
Question
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: Unit S 20 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $ 680,000 272,000 102,000 238,000 136,000 204,000 $ 1,632,000 S 48 The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $238,000 per year within the range of 24,000 through 34,000 Rets per year Required 1. Assume that due to a recession, Polaski Company expects to sell only 24,000 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 t profit byExplanation / Answer
ANswer:
1
Option
Amount $
1
Net increase in profits by
105200
Working
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue
= 10000*(53 * (1-16%))
445200
Less:
Direct Material Cost = 10000*20
-200000
Direct Labor Cost =10000*8
-80000
Variable Manufacturing Cost =10000*3
-30000
Variable Selling Expenses =10000*4*(1-75%)
-10000
Cost of Special Machine
-20,000
Net increase in profits
105200
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2
Option-2
2
Net increase in profits by
90000
Working
Calculation of the impact on profits next year if this special order is accepted
Incremental Revenue = 10000*2
20000
Additional recovery of Fixed manufacturing overhead = 10,000*7
70000
Net increase in profits
90000
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3
Option-3
3
Net Decrease in profits
-90000
Working
Incremental Revenue = 10000*2
20000
Additional recovery of Fixed manufacturing overhead = 10,000*7
70000
Less: Loss on contribution on regular units
=10,000*(53-20-8-3-4)
-180000
Net Decrease in profits
-90000
Option
Amount $
1
Net increase in profits by
105200