Polaskdi Company manufactures and sells a single product called a Ret. Operating
ID: 2580052 • Letter: P
Question
Polaskdi 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 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost S 20 10 $ 800,000 400,000 120,000 360,000 80,000 240,000 50 2,000,000 The Rets normally sell for $55 each. Fixed manufacturing overhead is constant at $360,000 per year within the range of 33,000 through 40,000 Rets per year. 1. Assume that due to a recession, Polaski Company expects to sell only 33,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 Required: Re s Polask is i g to accept a 16% discount off the egular p There would be no sales co n ssons on his order, hus, a able seling expenses would be sa ned by 75%. However, laski ompany would have to purchase a special machine to engrave the retail chain's name on the 7,000 units. T s mac e would cost S 14 000 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 2. Refer to the original data. Assume again that Polaski Company expects to sell only 33,000 Rets through regular channels next year. The U.S. Army would like to make a one time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polas ki Company for all costs of production (variable and fxed) selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?Explanation / Answer
1.
Net profit Increases by 74,900.
2. Profit = 7,000*(1.6+9) = 74,200
As all costs of production are reimbursed and fixed manufacturing overhead is not a relavent cost, the company gets benefited with fixed manufacturing costs of 9 per unit and the fixed fee.
Net profit increases by 74,200.
Sales [7,000*55-(55*16%)] 323,400 Variable costs : Direct Materials (7,000*20) 140,000 Direct Labour (7,000*10) 70,000 Variable manufactutring overhead (7,000*3) 21,000 Variable selling expense (7,000*0.6) 3,500 Fixed costs : Special machine 14,000 Profit 74,900