Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2559596 • Letter: P
Question
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 40,000 Rets per year. Costs associated with this level of production and sales are given below: Total Unit $ 20 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost 7 2 6 $ 46 $800,000 320,000 120,000 280,000 80,000 240,000 $1,840,000 The Rets normally sell for $51 each. Fixed manufacturing overhead is constant at $280,000 per year within the range of 32,000 through 40,000 Rets per year. Required 1. Assume that due to a recession, Polaski Company expects to sell only 32,000 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 2. Refer to the original data. Assume again that Polaski Company expects to sell only 32,000 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 $1.40 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? Net profit by 3. Assume the same situation as that described in (2) above, except that the company expects to sell 40,000 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 byExplanation / Answer
Req 1: Sales units for Special Order = 8,000 units Selling price for Special order = $ 51-16% = $ 42.84 per unit Variable cost per unit to be incurred for Special order: Direct Material 20 Direct Labour 8 Variable Manufacturing Overheads 3 Variable Selling Overheads($ 2-75%) 0.5 VARIABLE COST PER UNIT 31.5 Contribution perunit = Selling Price - Variable cost ( 42.84- 31.50 )= $ 11.34per unit Total Contribution from Special Order = (8000 units@11.34) = $ 90,720 Additonal Fixed Cost incurred (Machine for engraving) = $ 16,000 Therefore, Net Income will increase by (Contribution-Fixed Cost) = (90,720-16,000) = $ 74,720 Net Profit Increases by $ 74,720 Therefore, offer must be acccepted. Req 2: Order from US Army = 8,000 units Total cost reimbursed and Revenue from Army: Direct material (8000*20) 160,000 Direct labor (8000*8) 64,000 Variable Manufacturing Cost (8000*3) 24,000 Fixed Manufacturing Cost (8000*7) 56,000 Total Cost reimbursed by US Army 304,000 Add: Fixed Fees(8000 units@1.40) 11200 Total ReVenue from US Army Order 315,200 Actual Additional Cost incurred for the Order Direct material (8000*20) 160,000 Direct labor (8000*8) 64,000 Variable Manufacturing Cost (8000*3) 24,000 Total Additional Cost incurred 248,000 Therefore, Additional Profits Earned from Order (Revenue-Additional Cost) = (315200-248,000) = $67,200 Net profit Increased by $ 67,200 Hence, offer must be accepted Req 3: Total Revenues from Earned from US Army 315,200 Less: Total Revenue from regular customer(8000 units@51) 408000 Loss of Revenue -92,800 Less: Savings in Variable selling expense to be incurred in case of regular customer 16,000 (8000 units@2) Decrease in Net operating income -76,800 Net profits decreases by $ 76,800