Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets
ID: 2580674 • Letter: A
Question
Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 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 7,000 units. This machine would cost $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.
Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 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 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?
Assume the same situation as that described in (2) above, except that the company expects to sell 32,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 7,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 7,000 Rets were sold through regular channels?
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 32,000 Rets per year. Costs associated with this level of production and sales are given below:
Explanation / Answer
Answer a. Statement of Incremental Profit Special Order is accepted - 7,000 Rets Particulars Amount Sales to Retail Chain ($56 X 84% X 7,000 nos) 329,280 Less: Direct Material ($25 X 7,000 Nos) (175,000) Less: Direct Labor ($6 X 7,000 Nos) (42,000) Less: Variable Manufacturing Overhead ($3 X 7,000 Nos) (21,000) Less: Variable Selling Exp. ($4 X 25% X 7,000 Nos) (7,000) Less: Special Machine Purchased (14,000) Incremetal Profit / (Loss) 70,280 Net profit will be increased by $70,280 if order is accepted. Answer b. Statement of Incremental Profit Army Order is accepted - 7,000 Rets Particulars Amount Sales to Army (7,000 Units X 42.60) 298,200 Less: Direct Material (25 X 7,000 Nos) (175,000) Less: Direct Labor ($6 X 7,000 Nos) (42,000) Less: Variable Manufacturing Overhead ($3 X 7,000 Nos) (21,000) Incremetal Profit / (Loss) 60,200 Net profit will be increased by $60,200 if order is accepted. Calculation of SP per Unit to Army Fixed Fees per Ret 1.60 Direct material 25.00 Direct labor 6.00 Variable Manufacturing Overhead 3.00 Fixed Manufacturing Overhead 7.00 Total Selling Price per ret 42.60 Answer c. Statement of Incremental Profit Army Order is accepted - 7,000 Rets Particulars Amount Sales to army (42.60 X 7,000 nos) 298,200 Less: Sales to regular customers ($56 X 7,000 Nos) (392,000) Add: Saving of Variable Selling Exp. ($4 X 7,000 Nos) 28,000 Incremetal Profit / (Loss) (65,800) Net profit would be decreased by $65,800 if order is accepted.