Polaski Company manufactures and sells a single product called a Ret. Operating
ID: 2583360 • Letter: P
Question
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 wit this level of production and sales are given below Direct labor The Rets normally sell for $56 each. Fixed manufacturing overhead is constant at 224,000 per year within the range of 26,000 through 32,000 Rets per year Required 1. Assume that due to a recession, Polaski Company expects to sell only 26,000 Rets through regular channels next year. A large retail chain has offered to purchase 6,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be ' 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 6,000 units. This machine would cost $12,000. 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 26,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 6,000 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? 3. 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 US Army's order would require giving up regular sales of 6,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 6,000 Rets were sold through regular channels?Explanation / Answer
1) New contribution margin Selling price 56*(1-.16) 47.04 less :Variable expense Direct materials 25 Direct labor 8 variable manufacturing overhead 3 variable selling expense (2*25%) 0.5 total variable expense 36.5 -36.5 New contribution margin 10.54 total contribution margin (6000*10.54)= 63240 less :cost of machine -12,000 Net income 51240 Net profit increases by 51,240 2) Fixed fee 1.4 Fixed manufacturing overhead reimbursed 7 total 8.4 total contribution 6000*8.40 = 50400 Net profit increase by 50,400 (note though VMOH is also reimbursed ,it is not considered as the same amount will be incurred in production also) 3) original contribution margin per unit Selling price 56 less :Variable expense Direct materials 25 Direct labor 8 variable manufacturing overhead 3 variable selling expense 2 total variable expense 38 -38 New contribution margin 18 contribution lost (6000*18)= -108000 income from Army order 50,400 Net loss -57600 Net profit will decrease by -57600