Polaski Company manufactures and sells a single product called a Ret. Operating

Question

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below: Unit 20 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense 960,000 288,000 144,000 336,000 192,000 288,000 6 3 4 6 46 2,208,000 Total cost The Rets normally sell for $51 each. Fixed manufacturing overhead is constant at $336,000 per year within the range of 43,000 through 48,000 Rets per year Required 1. Assume that due to a recession, Polaski Company expects to sell only 43,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 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 5,000 units. This machine would cost $10,000 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

Explanation / Answer

Solution 1:

Therefore, Net profit would increase by $54,200.

Solution 2:

Since U.S. Army would Reimburse all Costs of Production to the polaski company, therefore Polaski Company will have a Profit of $1.8 per ret.

Increase in Profit = $1.8 * 5000 = $9000

Solution 3:

If 5000 Rets are sold through regular Channels, then Profit = 5000* (selling price - All variable costs)

= 5000* ($51 - $20-$6- $3-$4) = 5000* 18 = $90000

If 5000 Rets are sold to Army, then Profit = 5000* $1.8 = $9000

Therefore if 5000 rets are sold to army instead of through regular channels, then net profit would decrease by = $90,000 - $9,000 = $81,000

Financial advantage (disadvantage) of special order of 5000 Rets Particulars Amount Selling price per unit ($51*84%) $42.84 Revenue (5000*$42.84) (A) $2,14,200.00 Cost: Direct Material (50000*$20) $1,00,000.00 Direct Labor (5000 * $6) $30,000.00 Variable manufacturing overhead (5000*$3) $15,000.00 Variable Selling Expense (5000*4*25%) $5,000.00 Special Machine Cost $10,000.00 Total Cost (B) $1,60,000.00 Net Profit (A-B) $54,200.00

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